Make No Mistake: President Donald Trump Has a Tariff Problem That Could Be a Roadblock for a Stock Market Hovering Around All-Time Highs

Key Points

So far, overall inflation data has remained relatively tame. However, there have been recent indications that inflation could be building. Higher inflation could lead to a series of events that makes it harder for the stock market to continue its strong run. These 10 stocks could mint the next wave of millionaires ›

Since President Donald Trump stared enacting tariffs earlier this year, everyone from Federal Reserve Chairman Jerome Powell to the average retail investor has been trying to figure out how they will affect the economy and whether they will reignite inflation.

So far, the economy and inflation seem to be OK. However, it's still early, and the tariffs are constantly changing, which makes understanding the longer-term impact even more difficult.

The Trump administration and many in support of tariffs have said that they will not lead to higher inflation and have been lobbying Powell to lower interest rates. But make no mistake: President Trump has a tariff problem that could be a roadblock for a stock market hovering around all-time highs.

Somebody is going to have to bear the cost

Tariffs are a tax on imported goods, intended to make foreign goods more expensive, therefore aiding the competitive position of domestically made goods. So far, Trump's tariffs have brought in significant revenue, including more than $29 billion in customs and excise taxes in July. In prior years, the monthly customs and excise taxes have amounted to less than $10 billion.Official White House Photo by Tia Dufour.

However, most economists and other experts point out that someone has to foot the bill, which is why they are concerned about an eventual rebound in inflation. Up until now, inflation has remained subdued, or at least not risen like some expected, although core inflation rose in both June and July.

But the biggest indicator that higher inflation could be cooking came after a recent Producer Price Index (PPI) report. Although the PPI is not as widely followed as the Consumer Price Index (CPI), the July PPI certainly moved markets this month.

That index looks at the change in producer prices across industries and essentially serves as a gauge of wholesale inflation. What investors should think about is that if manufacturers are seeing price increases, how long until those funnel down and eventually hit consumers?

The July PPI increased 0.9% from the prior month, significantly higher than the consensus estimate of 0.2%. It was the biggest monthly increase since June of 2022, a period of extremely high inflation in the U.S.

CalBay Investments Chief Market Strategist Clark Geranen recently told CNBC: "The fact that PPI was stronger than expected and CPI has been relatively soft suggests that businesses are eating much of the tariff costs instead of passing them on to the consumer. Businesses may soon start to reverse course and start passing these costs to consumers."

Story Continues

Prior to the PPI report, traders betting on changes in the federal funds rate had placed a nearly 99% chance that the Fed would cut interest rates at its September meeting. As of this writing on Aug. 19, that percentage had dropped to about 85%, according to CME Group's FedWatch tool.

The stock market is pricing in significant rate cuts

President Trump's problem, in my view, is that the market is pricing in significant interest rate cuts. Between now and the end of 2026, the forward curve indicates there will be five cuts. While the market doesn't necessarily want the Fed to have to make cuts due to some kind of severe recession or economic downturn, incremental cuts to support the economy and keep it on sound footing are expected to bolster the market, which seems to be a contributor in driving it to new all-time highs on numerous occasions this year.

Powell won't cut rates five times if the Fed sees inflation moving higher, because that could put the economy in a stagflation scenario, where unemployment and inflation are both moving higher, making it more difficult for the Fed to achieve its dual mandate of stable prices and maximum employment.

I think the tariffs at the very least will keep the market and the Fed in a period of uncertainty, making it potentially difficult for the Fed to cut rates as much as the market hopes. With the stock market hovering near all-time highs and with a stretched valuation, I believe this dynamic could create a roadblock for the market.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool recommends CME Group. The Motley Fool has a disclosure policy.

Make No Mistake: President Donald Trump Has a Tariff Problem That Could Be a Roadblock for a Stock Market Hovering Around All-Time Highs was originally published by The Motley Fool

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