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President Donald Trump's escalating trade war may be rattling corporate boardrooms and slowing consumer spending, but the U.S. economy so far has kept humming along.
The latest encouraging sign came Wednesday, when the Labor Department reported that inflation remained mild in May, rising at an annual pace of 2.4 percent - less than economists had anticipated. The labor market continues to chug along as well, adding a healthy 139,000 jobs last month, which also beat expectations.
The wave of good news has surprised analysts who had braced for higher inflation and weaker hiring amid the uncertainty surrounding Trump's unpredictable trade moves - including new tariffs that were quickly scaled back or delayed. The inflation report comes the day after U.S. and Chinese negotiators announced a framework for a deal to reduce tariffs and other economic restrictions between the countries, suggesting the administration may further retreat in its global trade war. That could remove another threat from the U.S. economy.
"The fact that we have not seen a bigger impact from tariffs on both inflation and the labor market to date is striking," said Krishna Guha of Evercore ISI.
Big companies, in particular, seem to have prepared well by stocking inventories ahead of the tariffs, Guha said. Many also found alternative suppliers, improved productivity and pressured wholesalers and distributors to absorb some of the extra costs.
For now, most firms are holding off on major price increases while they wait to see if the Trump administration pulls back on its trade threats. But if tariffs stay high, economists still expect to see real damage over time - in the form of both higher prices and slower job growth.
"Without a doubt, firms are absorbing some of the costs," said Joe Brusuelas, chief economist at RSM. "But it does not alter the reality that there are price hikes on the way into the economy."
Still, the surprising resilience of the economy may have significant repercussions for the Trump administration and the upcoming 2026 midterm elections. Trump and his aides for weeks suggested they would be willing to risk an economic recession to rebalance the global trade system, and the chaos inflicted by Trump's tariffs appeared to hurt his popularity among voters. The trade war caused a sharp contraction in the stock market and volatility in the bond market that rattled investors across the world.
But the administration has since largely backed off its most drastic measures and is poised to soon pass a more than $2 trillion tax measure that could provide a further economic boost. The developments suggest Trump may keep the economy from suddenly unraveling - and that his party could mitigate the political consequences of such a downturn - even if it entails a recognition that his initial plans were impossible to implement.
The White House hailed Wednesday's inflation report as the latest sign that "America is beating inflation" under Trump. The president also welcomed the report, taking to his social media platform Truth Social to renew his calls on the Federal Reserve to cut borrowing rates by a full percentage point.
"Great numbers!" the president wrote in all caps, adding that lower rates would translate into lower interest costs on U.S. debt. "So important!!!" he wrote.
Since January, the Fed has been in a wait-and-see policy stance on interest rates amid a cloudy economic outlook and uncertainty over how Trump's policies, particularly on tariffs, will affect the economy. Fed officials have repeatedly said they are well positioned to wait for more clarity on the outlook for inflation and economic growth, despite consistent pressure from the president to lower interest rates.
"If the large increases in tariffs that have been announced are sustained, they're likely to generate a rise in inflation, a slowdown in economic growth and an increase in unemployment," Fed chairman Jerome H. Powell said at a news conference last month.
The Fed is expected to hold rates steady next week for a fourth straight meeting, with investors in futures markets putting the odds at nearly 100 percent. Most investors don't expect another rate cut until the Fed's September meeting.
The Fed's benchmark short-term rate, which trickles through the financial system to influence what millions of consumers and businesses pay to borrow money, sits at 4.25 to 4.5 percent.
In addition to a subdued 2.4 percent annual rate, Wednesday's inflation report showed that prices excluding food and energy categories - so-called core prices - rose 2.8 percent, which was also below economists' expectations. On a monthly basis, overall prices were up just 0.1 percent.
The news wasn't entirely rosy. There are signs that tariffs are already rekindling inflation in some categories, including toys, which overwhelmingly come from China. Prices for toys, games and playground equipment rose by 2.2 percent in May, the largest one-month increase on record. Several goods that had been getting cheaper when Trump took office - including consumer electronics and toys - have all instead risen in price by about 0.5 percent since January, according to Ernie Tedeschi, who served as a top economist in the Biden administration.
Skanda Amarnath, executive director of Employ America, a left-leaning policy organization, also said that healing supply chains, which had been severely disrupted by the covid pandemic, are likely muting the impact of the tariffs on a broad range of prices. Housing inflation in particular has eased due to trends that predate the Trump administration but continue to provide some relief for consumers.
But it's also likely it will still take a few months for the tariffs to appear in the inflation data - perhaps as late as the end of the summer - because it will take firms time to decide how or whether to pass on the tariffs to consumers, he said.
"There's a lot more lags in this stuff than people realize," Amaranth said. "There's a lot of lags and latency issues that people underestimate."
Still, increases that some economists were expecting failed to materialize last month. For instance, apparel prices fell 0.4 percent, while prices for new vehicles declined 0.3 percent. Both categories are expected to see tariff-fueled price pressures.
For the auto industry, tariffs are still expected to drive up vehicle prices by thousands of dollars, after the Trump administration imposed levies of 25 percent on imported autos. While the White House later moved to soften the blow by ensuring that auto tariffs don't "stack" on other duties applying to inputs such as steel and aluminum, even those vehicles assembled in the United States will face higher component costs, analysts say.
While designed to protect U.S. industries, tariffs often raise prices for consumers, leaving Fed officials to parse whether inflation is being driven by one-time pricing changes they can look through or a sign of overheating that calls for tighter monetary policy.
Despite the spate of strong data, policymakers say it's difficult to assess the strength of the economy, as tariff-related uncertainty upends spending and investment patterns. During the first quarter, gross domestic product declined slightly, largely because of a surge in imports - which count against GDP - ahead of anticipated tariff increases that are likely to reverse.
While the labor market is at or near the Fed's goal of maximum employment, the future is uncertain. The administration's trade and other policies could yet raise the unemployment rate while raising inflation during the rest of this year, Fed governor Adriana Kugler said in a speech last week.
The Fed's existing wait-and-see approach is "currently appropriate" to achieve the central bank's dual goals of maximum employment and stable prices, she said.