Written by Christopher Rugaber

WASHINGTON (AP) — Inflation has risen in three of the past four months and is slightly higher than it was a year ago, when it helped sink then-Vice President Kamala Harris’ presidential campaign. However, you wouldn’t know that by listening to President Donald Trump or even some of the Fed’s inflation fighters.

“Grocery prices are down, mortgage rates are down, and inflation has been defeated,” Trump told the United Nations General Assembly late last month.

And when A High-level speech in Augustbefore the Federal Reserve lowers its key interest rate First time this year“Inflation, although still fairly high, has fallen significantly from its post-pandemic highs,” Federal Reserve Chairman Jerome Powell said. “The upside risks to inflation have diminished.”

However, ignoring or even underestimating inflation, while it is still above the Fed’s 2% target, poses significant risks for the White House and the Fed. For the Trump administration, it may find itself on the wrong side of a potential issue: Surveys show that many Americans still see high prices as a major strain on their finances.

The Fed may be taking an even bigger gamble: It lowered its key interest rate on the assumption that the Trump administration’s tariffs would only lead to a temporary spike in inflation. If this turns out to be false – if inflation worsens or remains high for longer than expected – the Fed’s credibility in fighting inflation could take a major hit.

This credibility plays a role Critical role In the ability of the Federal Reserve to maintain price stability. If Americans were confident in the central bank’s ability to keep inflation under control, they would not take steps – such as demanding sharply higher wages when prices rise – that would trigger an inflationary spiral. Companies often increase prices to compensate for higher labor costs.

But Karen Dinan, a senior fellow at the Peterson Institute for International Economics, said this week that as memories of pandemic-era inflation continue to emerge, and tariffs drive up the cost of imported goods, consumers and businesses may begin to lose confidence that inflation will remain low.

“If that proves to be the case, in hindsight, the Fed’s cuts — and I expect more of them — will be seen as a mistake,” Dinan said.

So far, the Trump administration’s tariffs have not raised inflation as much as many economists expected earlier this year. It is still well below the peak of 9.1% reached three years ago. However, consumer prices rose 2.9% in August compared to the previous year, up from 2.6% at the same time last year and above the Fed’s target of 2%.

The government is scheduled to release its September inflation report on Wednesday, but the data will likely be delayed Government shutdown.

Tariffs have raised the cost of many imported items, including furniture, appliances and toys. Overall, the cost of long-lasting manufactured goods rose about 2% in August from a year earlier. It was a modest gain, but it comes after nearly three decades of rising costs for these items Mostly fell.

The cost of some everyday goods is still rising more quickly than before the pandemic: Grocery prices rose 2.7% in August from a year ago, the largest increase, outside of the pandemic, since 2015. Prices rose Nearly 21% last year, partly because Trump imposed 50% import taxes on Brazil, a major coffee exporter, and also because drought caused by climate change has reduced coffee bean yields.

Most Fed officials remain concerned that inflation is too high, according to minutes from its September 16-17 meeting. However, they chose to cut key interest rates, because they were more concerned about the risk of worsening unemployment than of rising inflation.

But what worries some economists is that the continued implementation of tariffs and the fact that many companies are still implementing price hikes in response could lead to more than just a temporary increase in inflation.

“It’s a big gamble, after what we’ve been through … to count on it being fleeting,” said Jason Furman, a Harvard economist and former senior adviser to President Barack Obama. “Once upon a time, (inflation of 3%) was considered really high.”

Just two weeks ago, he slapped Trump New definitions on a range of productsincluding 100% on medicines, 50% on kitchen cabinets and bathroom sinks, and 25% on heavy trucks. He threatened on Friday “Huge increase in customs duties” on imports from China in response to that country’s restrictions on exports of rare earth elements.

Some companies are still raising prices to compensate for tariff costs. Tariffs on steel and aluminum imports have pushed up the cost of Campbell Soups’ cans, prompting the company’s CEO to say in September that it would implement “surgical pricing initiatives.”

Chris Butler, CEO of the National Tree Company, the nation’s largest seller of artificial Christmas trees, says his company will raise prices about 10% this holiday season on its trees, wreaths and wreaths to offset the costs of the tariffs. About 45% of its trees are made in China, with the rest from Southeast Asia, Mexico and other countries. The cost of labor and real estate is too high to be manufactured in the United States, he said.

Butler also expects there will be a reduced supply of artificial trees and ornaments this year, which could push up prices industry-wide further, because most production in China stopped when tariffs on that country reached 145% earlier this year. Production resumed after Trump reduced tariffs to 30%, but at a slower pace.

Butler has pushed his suppliers to absorb some of the costs of the tariffs, but they will not pay all of them.

“At the end of the day, we can’t absorb all of it, and our factories can’t absorb all of it,” he said. “So we had to pass some of the increases on to consumers.”

Many Fed policymakers are aware of the risks. Jeffrey Schmid, president of the Federal Reserve Bank of Kansas City, which votes on interest rate decisions, said Monday that higher inflation resulting from a loss of confidence in the central bank is harder to fight than other price rises, such as those resulting from supply disruptions.

“The Fed must maintain its credibility on inflation,” Schmid said. “History has shown that although all inflation is universally disliked, combating all inflation is not equally costly.”

However, some Fed officials say other trends are offsetting the impact of the tariffs. Fed Governor Stephen Meiran, who was appointed by Trump ahead of the central bank’s September meeting, said on Tuesday that a steady slowdown in rental costs would reduce core inflation in the coming months. He added that the sharp decline in migration as a result of the administration’s tough crackdown will lead to lower demand, easing inflation pressures.

“I’m more optimistic about inflation expectations than a lot of other people,” he said.

Originally published: October 12, 2025 at 7:03 AM EST