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.
