The temporary agreement reached over the weekend to de-escalate the trade war with China has largely scaled back projections of how much damage tariffs will inflict on the economy. The 90-day reprieve—a move that brought the combined 145 percent U.S. tariffs on most Chinese imports down to 30 percent—suggests some relief. But should the catch-up period to restock supply create congestion at ports, that may actually lead to increases in the CPI, according to Bloomberg Economics. And even with the tariff reduction, U.S. importers are wrestling with higher trade costs and fear tariffs could jump again when the pause is up. While several economists say the United States is now likely to avert a recession, the new duties will likely keep inflation well above the Federal Reserve’s target.

“We might be in a bit of a sweet spot right now for core inflation trends. Core goods prices have yet to reflect the impact of the tariff hikes that have taken place since February, while services inflation continues to gradually ease,” Brian Coulton, chief economist at Fitch Ratings, said in a note. “Core goods inflation is likely to pick up in the next few months as inventories of goods imported pre-tariff hikes get depleted.”

Given the extreme uncertainty around how the tariffs will evolve and will ultimately impact the economy, the Federal Reserve is keeping interest rates on hold for the foreseeable future. The soft inflation data offers support for bets on at least two rate cuts this year.

Companies from Nintendo Co. to Procter & Gamble Co. have suggested that they’ll try to pass on the cost of tariffs to consumers. However, the extent of their pricing power is unclear as demand slows. Consumer spending in retail sales data—which largely captures outlays for goods—was probably flat in April, ahead of a report due Thursday. Elsewhere in the CPI data, grocery prices declined by the most since 2020, dragged down by the biggest drop since 1984 in egg prices. However, prices of furniture and appliances—goods that are largely imported—jumped.

While all eyes have been on the impact tariffs will have on goods prices, one of the key drivers of inflation in recent years has been housing costs—which make up the largest category within services. Shelter prices experienced a 0.3 percent increase, led by rents.

Excluding housing and energy, services prices climbed 0.2 percent after declining in March. From a year ago, those costs advanced 2.7 percent, the weakest pace in four years. While central bankers have stressed the importance of looking at such a metric when assessing the overall inflation trajectory, they compute it based on a separate index. That measure—known as the personal consumption expenditures (PCE) price index—doesn’t put as much weight on shelter as the CPI, which helps explain why it’s trending closer to the Fed’s 2 percent target. A government report on producer prices due Thursday will offer insights on additional categories that feed directly into the April PCE, which is scheduled for release later this month.

In addition to seeking fairness in bilateral commerce and shoring up national industrial security, the Trump administration contends that tariffs will help stoke domestic manufacturing and investment over the longer term. Critics counter that the tariffs themselves are actually adding to a host of challenges already inhibiting reshoring.

Central bankers also pay close attention to wage growth, as it can help inform expectations for consumer spending—the main engine of the economy. A separate report today that combines the inflation figures with recent wage data shows real average hourly earnings climbed 1.4 percent from the year before, matching the highest since October.

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