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The average tariff rate on U.S. imports jumped from 2.6% to 13% over the course of 2025, according to the Federal Reserve Bank of New York. On paper, that kind of increase should have pushed inflation higher. Instead, headline inflation actually eased from 2.9% year over year in December 2024 to 2.7% in December 2025. Core inflation, which excludes volatile food and energy prices, also slowed from 3.2% to 2.6%.Did tariffs somehow stop being inflationary?Not exactly. Although foreign exporters did not reduce prices enough to offset the tariffs, U.S. companies, concerned about losing market share, chose to absorb much of the impact, often sacrificing their profit margins to remain competitive rather than passing on the full increase to customers.But that shield appears to be cracking.December’s PCE report showed inflation picking up again, rising 0.4% month over month and 2.9% year over year. Core PCE also increased 0.4% on the month and 3% annually. Importantly, the acceleration was concentrated in core goods excluding food and energy, which climbed 0.4% month over month and 2% year over year. That suggests companies became more willing to pass tariff-related costs on to consumers in December.Inflation expectations are also worth watching. One-year expectations stood at 3.1% in January, while three- and five-year expectations remained at 3%, leaving room for further upside if price pressures continue to build. It is also worth noting that risk assets, including BTCUSD, remain under pressure, as higher inflation could keep the Fed tighter for longer. The same applies to gold and silver prices.What about the Supreme Court ruling declaring Trump’s tariffs illegal?First, the decision concerned tariffs imposed under the International Emergency Economic Powers Act (IEEPA), which covered approximately 60% of the measures introduced. Other tariffs, such as those on steel, aluminum, copper (50%), automobiles and auto parts (25%), furniture (25%), and wood (10-25%), remain in effect.Second, even without the IEEPA, the Trump administration has other legal tools to impose tariffs. In fact, this Saturday, a 15% tariff was introduced under Section 122 of the Trade Act of 1974. In addition, the U.S. president can invoke Sections 201, 301, 338, and 232, each with its own legal requirements.What does this mean for investors?If December’s rebound in PCE wasn’t just a one-off, the Fed may adopt a more cautious approach to rate cuts, which could put additional pressure on markets. The silver lining is that if volatility intensifies, some argue we could see another TACO trade from the president.
This article was written by IL Contributors at investinglive.com.
💡 DMK Insight
So, tariffs skyrocketing from 2.6% to 13% should’ve spiked inflation, right? But here’s the kicker: inflation eased instead. This discrepancy raises eyebrows for traders. Typically, higher tariffs lead to increased costs for consumers, which should push inflation up. Yet, the Fed’s data shows a drop in headline inflation to 2.9% year-over-year by December 2024. This could indicate that other factors are at play, perhaps a decrease in consumer demand or improvements in supply chains that offset tariff impacts. For day traders and swing traders, this is a crucial moment to reassess positions in inflation-sensitive assets like commodities or inflation-linked bonds. Keep an eye on the upcoming economic reports for any shifts in consumer sentiment or spending patterns. If inflation continues to decline despite these tariffs, it could signal a broader economic slowdown, impacting everything from equities to forex pairs sensitive to U.S. economic health. Watch for any significant changes in the CPI or PPI in the coming months as these will be key indicators for future trading strategies.
📮 Takeaway
Monitor upcoming CPI and PPI reports closely; a continued decline in inflation could signal broader economic shifts affecting multiple asset classes.
