President-elect Donald Trump speaks at the US-Mexico border on August 22, 2024 south of Sierra Vista, Arizona.
Rebecca Noble | Getty Images News | Getty Images
The latest tariff proposal from President-elect Donald Trump is likely to put upward pressure on US inflation, according to Goldman Sachs.
On Monday, Trump said on the social networking site Truth Social that he would impose additional tariffs of 10% on goods coming from China and duties of 25% on Canada and Mexico. Jan Hatzius, chief economist at Goldman Sachs, said in a note that the proposed tariffs would lead to a significant increase in consumer prices in the United States.
“Using our rule of thumb that every one (percentage point) increase in the effective tariff rate would raise core PCE prices by 0.1%, we estimate that the proposed tariff increases would boost core PCE prices by 0.9% if “It has been implemented.”
“PCE” stands for Personal Consumption Expenditures Price Index. The core personal consumption expenditures index, which excludes food and energy prices, is the Fed's preferred inflation reading.
A tariff-related increase in core personal consumption expenditures could cloud calculations around federal interest rate cuts. The personal consumption expenditures reading for October is due on Wednesday, and is expected to show a 2.8% increase on an annualized basis of 2.8%, according to economists polled by Dow Jones. In other words, inflation is still above the Fed's 2% target, and tariffs could widen that gap.
Traders have been backing down on their expectations for Fed rate cuts in 2025, although it is unclear how much of that is due to the election results versus the resilient US economy. Federal Reserve Chair Jerome Powell said the central bank will consider the impact of tariffs and other fiscal policy changes on the inflation trend once the details become clear.
It certainly remains to be seen whether the tariffs will actually be implemented at the levels proposed by Trump — or what exceptions might be made. The president-elect noted in his social media post that the tariffs were conditional on changes in immigration policy and enforcement of drug laws, specifically fentanyl. Some of Trump's advisors and supporters described the tariffs he proposed during the election campaign as a negotiating position rather than a specific policy.
For his part, Hatzius said that Canada and Mexico seem more likely to avoid comprehensive tariffs than China.
The three countries involved represent 43% of US goods imports, and the tariffs would result in revenues of just under $300 billion annually, according to Goldman Sachs calculations.
