President Donald Trump’s tariffs haven’t raised U.S. prices as much as anticipated, but inflation is still trending upward, complicating expectations for upcoming rate cuts from the Federal Reserve. At the same time, the tariffs could have a mildly disinflationary effect on the rest of the world, according to Capital Economics.
While American consumers and the Federal Reserve contend with the inflationary impact of President Trump’s tariffs, other parts of the global economy may actually see some relief.
In the U.S., tariffs have yet to push prices as high as expected, but inflation continues to tick upward, creating a hurdle for the Federal Reserve’s anticipated rate cuts.
The latest consumer price index (CPI) rose at an annual rate of 2.7% in July, slightly below forecasts of 2.8% and unchanged from June. However, the core CPI accelerated to 3.1% from 2.9%, and Capital Economics expects the full effect of tariffs to gradually increase over the rest of the year.
Outside the U.S., the impact 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.
This is largely because most countries have not retaliated against Trump’s tariffs with duties on U.S. goods. In some cases, tariffs on American imports have actually fallen.
For example, in the trade deal Trump negotiated with Indonesia, the Southeast Asian country agreed to remove tariffs on nearly all U.S. goods, while the U.S. has imposed a 19% duty on Indonesian imports.
“Moreover, 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.
Meanwhile, more inflationary pressure seems likely for American consumers. Though companies have absorbed much of the initial tariff-related costs, that situation may not last.
Retailers have been willing to sacrifice margins to offset tariffs, and surveys show U.S. companies have experienced significant cost increases—unlike their counterparts abroad.
“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,” MacAdam and Curtis noted.
Deflation in China
Not all economies are affected equally. China faces a steeper impact due to higher U.S. tariffs, creating 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, with stagnant consumer prices and falling producer prices. The trade war is likely to worsen the situation.
China’s exports to the U.S. have declined sharply in recent months, while shipments to other markets have increased, Brooks noted in a Substack post last month. He suggested China is transshipping goods through countries with lower duties to reach the U.S. and simultaneously boosting exports to non-U.S. markets.
Both strategies exert deflationary pressure. Transshipping adds transportation costs and reduces profits, while exporting to other markets requires lower prices to stimulate 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.”
