Martin Baccardax

"Float like a butterfly, sting like a bee," Muhammad Ali used to say. "The hands can't hit what the eyes can't see."

Economists, worried about the impact that President Donald Trump's tariffs will have on inflation, are starting to get the champ's point about his elusiveness in the ring. You can't put levies on imports that aren't happening.

Census Bureau data published Friday showed the biggest monthly decline in U.S. goods imports on record last month. The nearly 20% slump from March's record still left America with an overall deficit of $87.6 billion on the trade of goods, but the slower pace underscores the broader tariff uncertainty.

The April decline may also suggest that the front-running of imports, to avoid the "Liberation Day" tariffs unveiled by Trump on April 2, is coming to an end. CEOs have made it clear that they aren't willing to buy given the uncertain outlook for tariffs, and they are reluctant to raise prices in any case.

The effects on inflation, at least so far, are minimal. That leaves everyone from CEOs to the Federal Reserve uncertain about what to do next. No one can land a blow on the challenge, allowing the S&P 500 to rally 18% from its early April lows as the president has softened his tariff stance.

"I'm not gonna buy six months or a year worth of product just to avoid tariffs that may or may not materialize in different parts of the world, " Macy's CEO Tony Spring told investors earlier this week. Any price increases for the retailer as a result of new levies, he said, would be "surgical."

GAP CEO Richard Dickson, meanwhile, cautioned that if the current schedule of 30% tariffs on China-made goods and 10% duties on imports from other parts of the world remain in place, the retailer will lose as much as $150 million this year alone. He said he isn't prepared to raise prices across the board, at least "based on what we know today."

Which, truthfully, isn't that much, given that the president has accused China of breaking a deal that was sketchy in the first place, and a federal court has ordered a stay to Wednesday's ruling of the U.S. Court for International Trade that deemed "Liberation Day" levies illegal.

The trickle of goods that entered U.S. ports in April, as well as a reluctance from some companies to raise prices, is keeping inflation pressures in check.

The Federal Reserve's preferred gauge, the core personal consumption expenditures price index, rose at its slowest pace in four years last month. At 2.5%, inflation is only a bit worse than the 2% the central bank has set as its target.

Growth in consumption weakened, too, with real spending rising only 0.1% on the month, down from the 0.7% pace in April, despite a 0.8% gain in personal incomes. The former could reflect concern about higher prices ahead, while the latter may reflect a still-solid labor market.

Stocks pared earlier declines in the wake of the inflation release, and remain firmly on pace for their best run of May gains in more than three decades. Bond markets, too, were impressed, with benchmark 10-year Treasury yields falling three basis points, or hundredths of a percentage point, to 4.401%

But the optimism might not last.

"The markets may welcome today's moderate inflation data, but we'll have to wait until next month to get a real sense of how tariffs are affecting the economy," said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management. "The question isn't whether tariffs will have an impact, it's a question of how big that impact will be."

For now, the hit seems to be much harder on corporate profits. A Reuters report published Friday estimates the collective impact to U.S. profits from the current tariff slate has been $34 billion so far this year.

The impact on U.S. economic growth, meanwhile, is likely to be flat. The Commerce Department's latest reading of first-quarter gross domestic product continues to show a contraction, but the inventory buildup that caused it will unwind this quarter to boost headline growth.

The Atlanta Fed's GDP tracker, in fact, pegs current quarter growth at 3.8% following the April trade figures.

"The trajectory suggested by the April trade numbers implies that the 4.9 percentage point drag on headline growth from net trade in Q1 will flip to a contribution of a broadly similar size in Q2," said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.

The combination of uncertainty and still healthy growth might help explain why the Fed is so reluctant to act on interest rates. Dallas Fed President Lorie Logan, in fact, told an event in Waco, Texas, Thursday night that "monetary policy is in a good place" with slowing inflation and a resilient job market.

"It "could take quite some time to know whether the balance of risks is shifting in one direction or another," she said.

Much like Ali in his prime, neither the Fed, the markets, or anyone else can lay a glove on the tariff impact.

Write to Martin Baccardax at martin.baccardax@barrons.com

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May 30, 2025 14:05 ET (18:05 GMT)

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