Inflation Likely Ticked Higher in May  06/11 06:04

   U.S. inflation likely picked up a bit last month as President Donald Trump's 
tariffs start to bite, but lower prices for gas and possibly for air fares and 
used cars may limit the overall increase.

   WASHINGTON (AP) -- U.S. inflation likely picked up a bit last month as 
President Donald Trump's tariffs start to bite, but lower prices for gas and 
possibly for air fares and used cars may limit the overall increase.

   The government's inflation report, to be released Wednesday, is forecast to 
show that consumer prices rose 2.5% in May compared with a year ago, according 
to economists surveyed by data provider FactSet. That would be the first 
increase in four months and up from 2.3% in April. Excluding the volatile food 
and energy categories, core prices are projected to have risen 2.9% in May from 
a year earlier, up from 2.8% in April.

   Trump's tariffs are expected to contribute to the uptick by raising the cost 
of some imports, including clothes, furniture, appliances, and possibly new 
cars. Many retailers and some consumer products companies have said they have 
plans to raise prices or have already done so to cover the cost of the import 
duties.

   On a monthly basis, prices are expected to have moved up 0.2% from April to 
May, while core prices are forecast to have increased 0.3%. At that pace, core 
prices would rise much faster than the Federal Reserve's 2% target. Economists 
and the inflation-fighters at the Fed focus on core inflation because it often 
provides a better sense of where inflation is headed.

   Inflation has cooled in the past year and, excluding the impact of tariffs, 
economists say it would be on track to return to the Fed's target, which would 
allow the central bank to cut its key interest rates. Yet core prices have been 
more stubborn and were stuck between 3.2% and 3.4% for nearly a year until 
February, when they started to decline a bit.

   Last week, the Labor Department's Bureau of Labor Statistics, which compiles 
the inflation data, said it is reducing the amount of data it collects for each 
inflation report. Economists have expressed concern about the cutback, and 
while it isn't clear how sharp the reduction is, most analysts say it is likely 
to have a minor impact. Still, any reduction in data collection could make the 
figures more volatile.

   Nearly all economists expect Trump's duties will make many things more 
expensive in the second half of this year, including cars and groceries, though 
by how much is still uncertain. Trump has slapped 30% tariffs on all imports 
from China, plus a 10% baseline tariff on imported goods from every other 
country, and 50% import taxes on steel and aluminum.

   Given the potential for higher prices in the coming months, Fed Chair Jerome 
Powell and other Fed officials have made clear they will keep their key rate 
unchanged until they have a better sense of how tariffs will affect the economy.

   The full impact of the tariffs likely won't be felt until the second half of 
the year, analysts say, even though many tariffs have been in place, in one 
form or another, since March and April. There are several reasons it can take 
months for the duties to fully pass through into retail prices.

   To begin with, many companies tried to beat the clock by bringing in foreign 
goods before Trump's tariffs took effect, producing a flood of imports in 
March. As a result, they have stockpiled goods in warehouses that weren't hit 
by tariffs and so don't have to raise prices yet.

   Many companies also held off on hiking prices during the chaos of April and 
May, when Trump announced sweeping tariffs on imports from nearly 60 countries, 
only to put them on hold a week later. He also ramped up duties on China to 
145%, essentially cutting off trade with the United States' third-largest 
trading partner. Imports fell sharply in April as a result. The U.S. and China 
last month agreed to lower duties, with the U.S. now taxing Chinese imports 30%.

   For many firms, it wasn't worth it to raise prices until they had a better 
sense of where tariffs would settle. It's possible some duties could fall 
further if the Trump administration is able to reach trade deals in 
negotiations with China, the European Union, Japan and other countries.

   Still, Bryan Eshelman, a partner and managing director at consulting firm 
AlixPartners, said higher prices "are coming."

   Eshelman expects that shoppers will start feeling the impact in July, and 
predicts prices for back-to-school items like clothing and backpacks could go 
up anywhere from 5% to 15%. Retailers may add surcharges tied to higher tariffs 
costs at the cash register starting in September, he said.

   "I think that that's something that retailers are going to be loathe to pull 
out and do. And so I think they will wait to see how things unfold, " he said.

   Most imported goods are actually parts or raw materials for larger products, 
such as the steel and aluminum goods now facing 50% duties. It will take time 
for those costs to filter through the supply chain and affect prices.

   Some stores, however, have already said they will implement higher prices, 
including Best Buy, Walmart and Lululemon.

   It was only last month when Trump ripped into Walmart after the nation's 
largest retailer boldly warned that prices are already starting to go up on 
items like bananas. Walmart's chief financial officer John David Rainey told 
The Associated Press that a car seat that currently sells for $350 at Walmart 
will likely cost customers another $100.

   Rainey also told analysts at an Oppenheimer investor conference on Monday 
that for some items, Walmart will reduce inventory by as much as 20% because it 
expects higher prices will reduce demand, and it doesn't want to be stuck with 
leftover inventory.