Tr(D)ump the inflation progress.

 

 

Inflation concerns have taken a backseat, and now what haunts central bankers is the growth aspect of the economy. The Federal Reserve pivoted to an expansionary policy, considering the battle over inflation was under control. However, Trump imposing reciprocal tariffs on its trading partners, like 54% on China, the European Union at 20%, Vietnam at 46%, Taiwan at 32%, and many more in the list compelled the Federal Reserve to rethink the interest rate path considering the long-term uncertainty and volatility. The tariffs imposed have a basic idea of protectionism where “Make America Great Again” has become the famous slogan. This has undoubtedly questioned American exceptionalism in the past few days.

The economic side of the tariffs is that these affect the supply side of the economy, making it a cost-push inflation. Considering the empirical and theoretical evidence, supply-side inflation is hard to control and is less receptive to the general monetary policy tools. Any further loosening of the policy or rate cuts won’t prove of much use as it is no longer a demand-side problem. The US has been fighting inflation for a long time now. It is essential to consider comparitive cost advantage theory to produce a commodity considering the availability and pricing of the product accordingly. 

Looking at the 8% inflation number during the pandemic, prices have been sticky, with the February numbers of core PCE (an essential variable for the Fed to gauge the progress of its monetary policy measures) clocking in at 2.8%, which is still above the target rate of 2%. The hard data has yet to show signs of stress; however, soft data indicates it. The Federal Reserve, in its recently released summary of economic projections (SEP), mentioned a cautious outlook on further rate cuts and mentioned the slowing down of the economy due to expected fiscal measures by the Trump administration, which prompted a reduction in the growth outlook by the participants.

 Economic growth is now the concern where indicators like the US 10-year bond yields (down 17 bps) are sinking in anticipation of recessionary fears. Major global indices and relevant companies to the tariff announcements have shed a chunk of their market capitalization on the news of Trump imposing tariffs and a few countries announcing retaliatory tariffs, such as China announcing a 36% tariff effective from April 10, 2025. On this news, the Dow Jones Industrial Average dropped 5.5%, the S&P nosedived 5.97%, the European STOXX index closed 5.1% lower, Apple shares slumped 7%, with Tesla falling 10%, and many others added to the list. Billions of wealth were wiped out in the last few days. On Saturday, Jaguar Land Rover announced that they would be pausing their car exports to the US in order to figure out the 25% tariff cost imposed. This has put a lot of stress on the global economy and has affected the growth forecast, too.

There are various indicators that needs to be looked at specially in order to understand broader economic conditions of the US and global economies with respect to the implication of the tariff being imposed.

• Employment: Though the Non-farm payroll report (NFP) released on Friday posted a strong number of 228K, the imposition of tariffs will show a lagged effect on the job market with heightened uncertainty. This uncertainty of policy measures and retaliatory measures may lead to anticipatory layoffs, further putting pressure on the job markets and eventually affecting the companies.
• Wages: recent restrictions on the visa approvals and deportations of illegal immigrants to their countries may put pressure on the job market in general. Looking at their contribution to several low/semi-skilled jobs, this may lead to a reduction in output by the producer due to the unavailability of labor, further leading to higher wages owing to the tightness of the labor market. Higher wages may further add to the producer's price pressure, leading to increasing inflation.  
• Inequality: Certain empirical evidence (a working paper published by the IMF on January 15, 2019, titled “Macroeconomic Consequences of Tariffs”) shows that rising tariffs become an important cause of inequality in an economy. Availability of jobs, pay gaps, decrease in asset values, access to resources due to economic feasibility, etc., leads to inequality, of which few may be visible in the short term and few in the long term. Considering the current trend of investments in the Indian economy, more exposure of the consumer to capital markets may erode the gains/ value of the portfolio, further taking a toll on the wealth creation for the lower and middle-income class.
• Output/GDP: with the uncertainty in the market and persisting inflationary outlook in the economy, the producer as well as the consumer side may slow down consumption, leading to lower GDP numbers. Citi group forecasts a 40 bps drag on the GDP, seeing the direct and indirect impact of the tariffs. On the other hand, the SBI research unit anticipates a 50 bps impact on the GDP in the coming three years. JP Morgan has predicts the US economy would fall into recession at the end of this year. Federal Reserve Chair Jerome Powell has also expressed concerns about the slowing economy and the potential impacts of tariffs during his address at a conference in Arlington, Virginia, on Friday.

The problem with these tariffs is that they add to the cost of the producer as well as to the importer, making goods expensive. The cost of cars in the US may rise by $4000-$8000 due to the tariffs being imposed by Trump, according to a research by the Centre for Automotive Research. Considering the trade that the US does, like semiconductor chips imported from Taiwan, electronics, and apparel from Vietnam, major manufactured goods from China, etc., will create supply chain bottlenecks, further fuelling inflation. It is essential for the US and other countries to negotiate trade deals in order to stop the bloodbath on market floors. The US needs to revisit its immigration policies in order to maintain a stable labor market and calm down the market. A quote by Gandhi fits the best in this situation of retaliatory tariff, i.e., “An eye for an eye makes the whole world blind”.