Tariffs vs Inflation?
What has President Trump said this week?
〰️
What has President Trump said this week? 〰️
1. US Inflation Falls in January
U.S. inflation eased in January, with the annual Consumer Price Index (CPI) at 2.4%, while prices rose 0.2% month over month. Core CPI increased 0.3%, indicating that underlying price pressures persist even as the headline rate cooled (The Guardian, 2026). The latest reading follows a volatile 2025, when inflation dipped to 2.3% in April, climbed to 3% by September, and ended the year at 2.7%. Lower gasoline prices and moderating housing costs helped drive January’s slowdown (AP News, 2026).
However, while the inflation shock of the early 2020s has faded, the affordability hangover remains. Prices for essentials have risen sharply since 2020: groceries are up roughly 30%, rents up 36%, and the average monthly mortgage payment has nearly doubled. Even though average wages have risen about 31% since 2020, real income gains have been largely eroded by earlier price spikes, leaving many households feeling financially squeezed (Bloomberg, 2026).
Tariffs remain a key source of uncertainty. The White House argues the latest CPI data show no sustained tariff-driven spike, while Fed Chair Jerome Powell has said tariff effects are still passing through the economy and may cause temporary price increases before stabilizing. The Financial Times similarly highlights tariffs as a central investor focus, particularly as companies adjust supply chains and pricing strategies (Financial Times, 2026). With the Federal Reserve weighing mixed labor data and inflation still above its 2% target, the trajectory of prices, especially for essentials, will shape both rate-cut expectations and the political debate over affordability heading into the midterms (AP News, 2026; The Guardian, 2026; Bloomberg, 2026).
2. Rate Cuts? Not So Fast
The Fed’s January meeting minutes were just released this week in February, and they show officials were surprisingly wary of cutting rates further. While the record stops short of signaling that the Fed is actively preparing to hike, it does confirm that policymakers are moving further away from consensus around another cut, with several participants arguing that rate increases should remain on the table if inflation stays stubbornly above the 2% target (Bloomberg via Yahoo Finance, 2026; Axios, 2026; Yahoo Finance, 2026). That shift sets up a potential collision with President Trump, who continues pressing for lower borrowing costs, and it complicates the transition to Trump’s Fed chair nominee, Kevin Warsh, announced two days after the Jan. 27–28 meeting.
The minutes describe three competing camps: officials who support more cuts if inflation declines as expected, those favoring a longer pause until there is clear evidence inflation is “back on track,” and a more hawkish group warning that easing too soon could be misread as weakening the Fed’s commitment to price stability (Axios, 2026; Yahoo Finance, 2026). The Fed held rates at 3.5%–3.75% in a 10–2 vote, with Governors Christopher Waller and Stephen Miran dissenting in favor of a cut, and the committee also removed language that previously emphasized rising downside risks to employment (Bloomberg via Yahoo Finance, 2026). Since that meeting, data has come in stronger: January payrolls rose by 130,000, unemployment fell to 4.3%, and CPI inflation eased to 2.4%, giving officials more justification to stay patient (Axios, 2026).
AI is now emerging as a key wildcard in the rate debate. Some officials suggested AI-driven productivity gains could reduce inflation pressure over time, but Fed Governor Michael Barr directly pushed back on the idea that AI should justify near-term rate cuts, arguing it may instead raise the “neutral” rate by boosting investment demand and expectations of future earnings (Axios, 2026; CNN, 2026). That matters politically because Warsh has floated the opposite view, that AI could be structurally disinflationary and support cheaper borrowing costs, meaning the Fed’s internal debate is now colliding with the White House’s push for faster easing (CNN, 2026; Bloomberg via Yahoo Finance, 2026).
3. Japan Expands Investment in the United States
President Trump’s trade strategy with Japan is starting to deliver real capital flows. The U.S. and Japan announced the first wave of projects under last July’s trade framework, with $36 billion in planned Japanese investment into U.S. energy and strategic manufacturing. The initial package includes a $33 billion natural gas power plant in Ohio(expected to be the world’s largest), a Gulf Coast crude oil export facility, and a synthetic diamond manufacturing site in Georgia, all framed as strengthening supply chains and reducing reliance on China (The New York Times, 2026; The Guardian, 2026). The U.S. Commerce Department called the package a major “America First” trade win, emphasizing faster execution of large-scale industrial projects.
The $36 billion represents the first phase of a much larger pledge. Under the July agreement, Japan committed up to $550 billion in U.S.-based investments in exchange for the Trump administration imposing a 15% blanket tariff on Japanese exports, avoiding steeper duties previously threatened (The New York Times, 2026; Bloomberg, 2025). The agreement underscores Japan’s continued focus on industrial policy and economic security alignment with Washington. Prime Minister Sanae Takaichi, often described as an “Abe 2.0” figure, is associated with a more hawkish national security stance and efforts to strengthen Japan’s state capacity and long-term economic strategy (Jacob Shapiro Substack, 2026). The investment framework reinforces Tokyo’s emphasis on industrial competitiveness, supply chain resilience, and deeper strategic coordination with the United States, with additional project announcements reportedly under consideration.
However, execution remains a key variable. Japanese officials face internal debate over how to finance such large commitments, including reliance on the Japan Bank for International Cooperation, and whether some projects are “strategic but less than bankable” (The New York Times, 2026). At the same time, Japan’s 10-year government bond yield has climbed to its highest level since 2008, highlighting shifting rate expectations and fiscal pressures (Bloomberg, 2025). For investors, the emerging pipeline suggests potential opportunities in energy infrastructure, industrial equipment, critical-minerals processing, logistics, and export capacity, particularly where government backing accelerates deployment (The Guardian, 2026; U.S. Department of Commerce, 2026).