Fed’s Jerome Powell Expects Inflation from Tariffs To Be ‘Relatively Short Lived’ With a ‘One-Time Shift in Price Level’

At this year’s central bank conference in Jackson Hole, Federal Reserve Chair Jerome Powell used his keynote address to draw a bright line from higher trade barriers to the prices U.S. households are now paying [https://www.barchart.com/story/news/34395847/feds-jerome-powell-just-painted-a-grim-picture-of-the-u-s-economy-after-gdp-slowed-notably-and-job-growth-stalls-heres-why-its-bullish], saying the “effects of tariffs on consumer prices are now clearly visible.” He framed the coming months as a period of continued pass-through — which Powell expects will be uneven, drawn-out, and hard to time — as tariff costs filter through wholesalers, manufacturers, and retailers. 

The core policy question, the Fed chief argued, is whether these increases will merely raise the level of prices once, or risk reigniting persistent inflation. [https://www.barchart.com/story/news/34378911/feds-jerome-powell-warns-of-substantial-uncertainty-from-significantly-higher-tariffs-and-abrupt-slowdown-in-labor-force-growth] Powell’s “reasonable base case” is the former: a largely one-time step-up in the price level — though it’s important to note that “one-time” does not mean “all at once,” and evolving tariff schedules could keep the adjustment alive longer than markets would like.

The Fed chair backed that judgment with current readings on the inflation mix. Using estimates through July, he noted total PCE inflation running at about 2.6% year over year and core PCE at 2.9%, with core goods swinging from outright declines in 2024 to a 1.1% gain. That’s consistent with tariff pass-through showing up most clearly in traded-goods categories. Housing-services inflation continues to drift down, while nonhousing services remains a bit too firm for a clean 2% glide path. In other words, the tariff impulse is concentrated and visible, but not (yet) a broad-based reacceleration.

Powell also laid out the two main pathways by which a one-time price shock could morph into an ongoing inflation problem, and why the Fed thinks those risks are contained for now. First would be a wage-price spiral if workers demand compensation to restore real incomes eroded by tariff-driven price increases. With labor-market tightness easing and downside risks to employment rising, he called that outcome unlikely. Second would be a drift higher in inflation expectations, but market- and survey-based gauges remain anchored near the Fed’s 2% goal. The pledge from Powell for now is, “We will not allow a one-time increase in the price level to become an ongoing inflation problem.”

Behind the scenes, the mechanics Powell sketched out match what researchers are observing. Tariffs raise prices through direct pass-through on imported finished goods and indirectly via pricier foreign inputs embedded in U.S. production — two channels that can unfold at different speeds across categories and supply chains. That staggered transmission helps explain why inflation effects can “accumulate” over months even if the ultimate impact is limited to a level shift rather than a new inflation trend.

At the same time, not all prices respond equally. Studies from the Federal Reserve System and academia find pass-through tends to be higher for investment and durable goods, and lower for many consumer staples — while firm-level pricing power, competitive dynamics, and exchange-rate moves shape how much of the tariff is absorbed versus passed on. Recent work, for example, suggests a large tariff fully passed to investment goods could lift those prices near-term by an order of magnitude more than typical consumption items, underscoring why business costs — and capex — sit squarely in the line of fire.  [https://www.frbsf.org/research-and-insights/publications/economic-letter/2025/05/effects-of-tariffs-on-inflation-and-production-costs/?utm_source=chatgpt.com]

Policy-wise, Powell’s tariff framing sets up a deliberate, data-dependent stance. The near-term risk balance, he said, tilts upside on inflation and downside on employment, with the policy rate already closer to neutral than a year ago. If the tariff impulse behaves as a fading, one-time shock, the Fed can “proceed carefully,” resisting the urge to chase temporary price moves; if, instead, expectations or wages start to echo those price increases, the Federal Open Market Committee will lean against it. 

Either way, the message to households and markets is meant to be steadying: tariffs may keep nudging goods prices higher as they percolate through supply chains, but the Fed does not intend to let that transitory push solidify into a new inflation regime.

_ On the date of publication, Caleb Naysmith [https://www.barchart.com/news/authors/421/caleb-naysmith] did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here [https://www.barchart.com/terms#disclosure]. _