The more President Donald Trump threatens tariffs on the US’s trading partners, the more the worry of another inflation wave troubles global economists.
Stubborn consumer-price growth was bothering much of the world even before he entered the White House. With this week’s measures against China offering the first concrete evidence that Trump isn’t just jawboning, prospects for at least some escalation and counter-measures elsewhere are forcing analysts to question how far global disinflation can hold.
“Tariff wars are inflationary, that’s not up for debate,” said Carsten Brzeski, ING’s global head of macro research. “In many places, they add to lingering effects from the past inflation shock, as well as big structural challenges” like aging societies and climate change, he said. “There are currently only very few reasons to expect inflation to remain permanently low.”
While China shows little sign of vulnerability to a price shock for now, the same can’t be said for the rest of the world if some spiral of tariffs unfolds. Multiple economies face latent inflation pressures, either domestic or external.
In the US, a resilient labor market is keeping the Federal Reserve on alert as Trump’s policies and threats drive bond yields higher. Elsewhere, dollar strength is haunting emerging markets such as Indonesia. Euro-zone consumer-price growth data this week was faster than expected, and on Thursday, the Bank of England may be forced to raise its forecast for inflation.
Trump’s arrival has added to pre-existing worries. Despite an International Monetary Fund official declaring in October that the battle against inflation was “almost won,” attendees at the World Economic Forum in Davos last month harbored open doubts.
A Bank of America survey of global fund managers in January showed the re-emergence of global consumer-price growth as a key theme for 2025. The World Bank predicted slowing inflation but still warned that it “could prove to be more persistent than expected.”
That chimes with markets. US, European and Japanese inflation expectations have jumped significantly since Trump emerged as favorite to win the presidency, with all trading above 2% this week.
For the US in particular, analysts are openly starting to reassess inflation prospects. On Tuesday, Morgan Stanley scrapped its forecast for a Fed interest-rate reduction in March, with Chief US Economist Michael Gapen saying “on-again-off-again tariff uncertainty should raise the hurdle for Fed cuts.”
That followed Chair Jerome Powell’s remarks last week that officials aren’t in a rush to lower borrowing costs as policymakers pause easing to see further progress on inflation. The potential for increased tariffs complicates that outlook. — Bloomberg
