How Trump's tariffs might warp two crucial readings on the health of the US economy

President-elect Donald Trump has been quick to promise new tariffs on imports from China, Mexico, and Canada.

But his threats, if carried out, potentially threaten to upset inflation and investment and disrupt the broader economic cycle.

New duties on imports could reverse some of the hard-won progress on inflation that the Federal Reserve is still struggling to maintain. Meanwhile, making it more expensive to import goods from the nation’s neighbors to the north and south may also widen the trade deficit, weighing on investments elsewhere.

In seeking to deliver campaign promises to secure the border and establish favorable trade conditions — Trump said these tariffs are aimed at curbing what he described as an “invasion” of drugs and migrants into the US — Trump risks worsening the inflation woes that turned voters across the globe against incumbents and helped catapult him to power.

Chief among the knock-on effects of imposing tariffs is how the costs might be passed on to US consumers.

In a research note Tuesday, economists at Pantheon Macroeconomics wrote that, in a simple, static analysis, overall prices for US goods imports would jump by 8% if Trump imposes a 25% tariff on all goods imports from Canada and Mexico and an extra 10% tariff on those from China.

This would push headline PCE up by 0.9%, taking Wednesday’s reading of a 2.3% annual jump in prices back above 3%.

The analysis also comes as new data on Wednesday showed the Federal Reserve’s preferred inflation gauge — core PCE, which strips out food and energy costs — moving “sideways,” and raising questions over whether progress toward the central bank’s 2% inflation goal has stalled.

Pantheon’s team, led by Samuel Tombs, added, however, that the boost in consumer prices would be smaller than that crude calculation suggests. A range of mitigating factors would lessen the blow to Americans, including a change in trade flows and retailers absorbing some of the increased costs.

But tariffs may have another negative effect as companies figure out how to react to Trump’s coming orders.

“The threatened tariffs on Canada and Mexico will motivate US importers to front-load imports and accumulate inventories, regardless of whether the tariffs are implemented,” Barclays economists led by Pooja Sriram wrote in a research note on Tuesday.

“The 25% tariffs could intensify this pull-forward effect, leading to an even stronger surge in imports in late 2024 and early 2025, thereby widening the trade deficit.”

The gamesmanship and uncertainty that could surround even the discussion of potential tariffs may also further diminish economic prospects.

“Temporary and uncertain tariffs of this nature create natural incentives to delay investments, as businesses await more information about the longer-term viability of prevailing supply chains and their alternatives before committing to capex,” Barclays added.

Of course, many observers expect Trump’s tariff threats to have more bark than bite. For its part, Barclays wrote, “Our baseline is that the tariffs on Mexico and Canada likely will, ultimately, not be implemented.”

But the incentives for businesses to get ahead of rising future costs — even if those costs turn out to be hypothetical — could interfere with broader spending plans at both the corporate and sovereign levels.

“[These] threats are a remarkably effective tool, at least against countries where exports to the US amount to 20% of GDP or more,” wrote Capital Economics’ Paul Ashworth in a client note on Wednesday. “There will undoubtedly be more threats, with allies targeted just as much as traditional adversaries.”

Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on X @hshaban.

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