U.S. President Donald J. Trump’s reliance on the tariff tool kit is creating a level of uncertainty on multiple fronts, especially since inflation was already on the rise before he took office.
In fact, the only certainty is that more tariffs are on the way, and with that are rising concerns that inflation could go correspondingly higher too.
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Presently, the Consumer Price Index (CPI) rose 0.5 percent in January, seasonally adjusted. That put the annual inflation rate in the U.S. at 3 percent. The top three categories hitting consumers were food prices rising 0.4 percent, with eggs skyrocketing 15.2 percent, energy prices increasing 1.1 percent, and gasoline prices climbing 1.8 percent. According to the U.S. Bureau of Labor Statistics, apparel prices were down 1.4 percent last month.
Economists at Wells Fargo—Sarah House and Michael Pugliese—said in a research note that the “deflationary tailwinds of improving supply chains have petered out,” adding that the latest report “offers more evidence of progress in lowering inflation stalling out.” They concluded that with inflation running above the Federal Reserve’s stated 2 percent target, the labor market holding steady, and heightened uncertainty around economic policy changes, the Fed will likely stay on an extended hold on interest rates before considering possible cuts in the fall.
UBS chief investment officer Paul Donovan in a podcast Wednesday that price increases generally won’t show up for several months. That means there won’t be any “visible” inflation in the first quarter “unless the tax hikes are very aggressive.”
Meanwhile, Trump this week imposed 25 percent duties on all steel and aluminum imports, a move that’s expected to increase manufacturing costs in the U.S. He’s also threatened reciprocal tariffs—on a dollar-for-dollar basis—on imports from another country that has placed duties on U.S. goods. His thinking is to level the playing field because they’re imposing tariffs for American imports that are higher than the duties America has levied on their exports to the U.S. And, while seemingly far-fetched, he’s even floated the idea that tariffs could be one way to force Denmark to hand over control of Greenland to the U.S.
Economists at Goldman Sachs noted that while reciprocal tariffs would increase U.S. prices, they also see the potential for two benefits. The reciprocal option could be viewed as an alternative to an across-the-board tariff, and would lower the odds of a substantial tariff spike, such as a 10 percent to 20 percent universal tariff. The second possible benefit is that it could lead to lower tariffs on U.S. exports over time as countries rethink their tariff policies.
For Trump, the new trade penalties are a way for him to apply pressure to garner concessions on some key issues. At the same time the taxes also collect revenue to offset the budget deficit. Trump predicted last month at a keynote address to the World Economic Forum’s annual meeting that his new duties would bring in hundreds of billions of dollars to the U.S. Treasury. He’s primarily focused now on Illegal migration and the smuggling of fentanyl across U.S. borders.
Trump’s also playing a high-stakes game that could backfire. His tariff plan could start a trade war, or at the very least cause mistrust of the U.S. among our trading partners. It’s too soon to tell how Trump’s plan to tax all will pan out. He’s already backpedaled on the closure of the de minimus loophole by pausing duties on goods valued at $800 or less, or at least until the Commerce Department can figure out a tracking mechanism.
The one thing that’s most likely on the way from the increase in duties is a rise in inflation.
S&P Global’s chief economist for U.S. and Canada, Satyam Panday, said that if the U.S. follows through on the tariffs announced for Canada and Mexico, the new duties could cause a one-time 0.5 percent to 0.7 percent rise in U.S. consumer prices, provided the taxes stay in place through 2025. It also could result in a decline in U.S. real GDP (gross domestic product) over the next 12 months by 0.6 percent.
“In addition, the inflation rate itself could approach 3 percent by the fourth quarter of 2025,” Panday said. He added that even a 0.6 percent decline in real GDP would lower households’ purchasing power, elevate investment uncertainty and result in a “hit” on American exporters.
“S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses—specifically with regard to tariffs—and the potential effect on economies, supply chains, and credit conditions around the world,” Panday said.
In addition to consumer goods pricing challenges, supply chain disruption is expected due to Trump’s tariff policies.
His confrontational stance is expected to present a straining of relations with allies, particularly through his linkage of trade disputes to other unrelated issues of concern to the U.S., according to a report published by BMI, a Fitch Solutions Co.
Research analysts at BMI, which is separate from the credit arm Fitch Ratings, also said that the foreign-born workforce in the U.S. is about 32 million people, representing 19 percent of the total workforce. Undocumented migrants represent about 4 percent to 5 percent of the total workforce, significant enough that mass deportations could impact industries such as construction, agriculture and hospitality. They also found that certain sectors such as construction could see some wage pressures as demand for workers rise in areas such as California, where homes damaged by fires are rebuilt. However, wages in the wholesale, retail and logistics sectors have softened to about 2 percent, indicating less risk for wage pressures, BMI said.
According to BMI, consumers and retailers will face “significant challenges” due to the tariffs, with impacts varying across regions.
While American consumers will experience price hikes across multiple categories, it will be the retailers, especially smaller brands, that may struggle with increased costs and supply chain disruptions. The BMI analysts said the impact is less severe globally for markets such as Mainland China and the European Union. The two have both a lower exposure to U.S. imports and a more diversified supply chain.
While consumer behavior may trend towards more price-sensitive purchasing decisions, particularly in the U.S., retailers worldwide will need to balance absorbing the higher costs, passing them on to consumers, and finding other suppliers to remain competitive.
The analysts also expect shifts in global supply chains as businesses seek to diversify sources, potential localization of production in the U.S. where feasible, and a possible reduction in product variety, particularly from smaller brands.