Fed’s Kugler: Tariffs may entrench inflation via expectations, pricing power, and productivity

Fed Governor Adriana Kugler cautioned that disinflation “has slowed” and that tariffs are beginning to exert upward pressure on prices, a trend she expects to continue into 2025. Speaking overnight, Kugler emphasized that the balance of risks has tilted, with “greater upside risks to inflation” now emerging, even as downside risks to employment and growth loom on the horizon. As a result, she reaffirmed support for holding the current policy rate steady.

Kugler outlined three channels through which tariffs could entrench inflationary pressures. First, she noted that rising short-term inflation expectations may grant businesses “more leeway to raise prices”, thereby increasing inflation persistence.

Second, she flagged the risk of “opportunistic pricing”, where firms use tariff headlines as cover to hike prices even on unaffected goods. This, combined with higher costs on intermediate goods, could generate “second-round effects” on inflation.

The third concern relates to “lower productivity”. As firms contend with elevated input costs and weaker demand, they may reduce capital investment and resort to less efficient production methods, reinforcing inflationary pressure through lower productivity.

Full speech of Fed’s Kugler here.