- President Donald Trump’s tariffs haven’t hiked prices as much as expected, so far, but inflation in the U.S. Is still ticking higher, representing an obstacle for highly anticipated rate cuts from the Federal Reserve. Meanwhile, the effect of the tariffs on the rest of the world could be slightly disinflationary, according to Capital Economics.
As American consumers and the Federal Reserve grapple with President Donald Trump’s tariffs and their effect on inflation, the rest of the global economy may actually see some price relief.
In the U.S., tariffs haven’t raised prices as much as anticipated, so far, but inflation is still ticking higher, representing an obstacle for highly anticipated rate cuts from the Federal Reserve.
The latest consumer price index (CPI) increased at an annual rate of 2.7% in July, below forecasts for a 2.8% gain and flat versus June’s pace. But the core CPI still accelerated to 3.1% from 2.9%, and Capital Economics expects the impact of tariffs to gradually ramp up during the remainder of the year.
Outside the U.S., however, the picture looks different.
“We doubt that U.S. Tariffs will significantly affect inflation in the rest of the world, but if anything, the effect could be mildly disinflationary,” Capital Economics’ Simon MacAdam and Ariane Curtis wrote in a note on Wednesday.
That’s because most countries have not retaliated against Trump’s tariffs with duties of their own on U.S. Goods, they explained. And in some cases, levies on U.S. Imports have actually come down.
For example, in the trade deal Trump negotiated with Indonesia, the Southeast Asian country agreed to eliminate tariffs on nearly all U.S. Goods. But the U.S. Has imposed a 19% duty on Indonesian imports.
“What’s more, the hit to global demand should dampen price pressures, at the margin, while a redirection of Chinese exports away from the U.S. To other markets could reduce import prices,” Capital Economics added.
By contrast, more inflationary pressure looks headed for American consumers. While companies haven’t been passing on much of the tariff-related costs, that can’t last much longer, MacAdam and Curtis warned.
Retailers have been willing to absorb the initial cost of tariffs by sacrificing their margins, and surveys indicate U.S. Companies have seen significant cost hikes—unlike in the rest of the world.
“With many trade deals agreed, there is now greater certainty about where tariffs will end up, which should allow retailers to finally raise their prices,” they added.
Deflation in China
Not all economies will experience tariffs the same way. In fact, China will suffer a more severe impact as U.S. Tariffs on Beijing are steeper than on most other countries.
That represents a deflationary shock for the world’s second largest economy, according to Robin Brooks, a senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance.
China’s economy is already flirting with deflation, as consumer prices have been anemic while producer prices have been falling. The trade war should worsen the situation.
China’s exports to the U.S. Have plunged in recent months while they have jumped elsewhere, Brooks wrote in a Substack post last month. He thinks China is using nearby countries that face lower duties to transship goods to the U.S. While also ramping up exports to other non-U.S. Markets as a final destination.
Both put deflationary pressure on China. Transshipping exports via third countries adds to transportation costs and lowers profits for Chinese companies. Meanwhile, exporting more goods to other markets requires prices to come down to generate demand.
“In either case, the profitability of Chinese exporters is adversely hit,” Brooks explained. “For a country like China, which is massively export-dependent and already teetering on deflation, that’s a worrying prospect.”