Trump’s Trade War Poses a Risk of Triggering Global Inflation Once More

The increasing threats of tariffs by President Donald Trump against the US’s trade partners are raising concerns among global economists about the possibility of a new wave of inflation.

Read: US trade gap ballooned ahead of Trump term, tariff promises

Persistent growth in consumer prices was troubling global markets even before Trump took office. With his recent actions against China providing solid evidence that he is serious about these trade measures, analysts are now questioning the durability of global disinflation in the face of potential escalations and counter-actions.

“Tariff conflicts are inflationary, that’s indisputable,” remarked Carsten Brzeski, ING’s head of global macro research. “In numerous regions, they exacerbate ongoing impacts from prior inflation shocks as well as significant structural issues like aging populations and climate change. Overall, there are only a few reasons to anticipate that inflation will stay consistently low moving forward.”

While China currently appears resilient to price shocks, the same cannot be said for other parts of the globe should a cycle of tariffs continue. Many economies are experiencing underlying inflationary pressures, either from domestic or foreign sources.

Read: Xi’s careful reply to Trump tariffs shows China has more to lose

In the US, a strong labor market keeps the Federal Reserve vigilant as Trump’s policies and threats push bond yields higher. Furthermore, dollar strength is causing troubles for emerging markets such as Indonesia. This week’s data indicated that consumer price growth in the eurozone exceeded expectations, while the Bank of England may have to revise its inflation forecasts upward on Thursday.

Trump’s presidency has amplified existing economic fears. Although an official from the International Monetary Fund stated in October that the fight against inflation was “almost won,” participants at last month’s World Economic Forum in Davos expressed significant concerns.

A January survey of global fund managers by Bank of America highlighted the return of global consumer price growth as a major theme for 2025. The World Bank predicted a deceleration in inflation but cautioned that it “could turn out to be more persistent than anticipated.”

Market responses further echo these sentiments. Inflation expectations in the US, Europe, and Japan have surged notably since Trump became the frontrunner for the presidency, with all indicators registering above 2% this week.

In the US, analysts are beginning to reassess inflation forecasts. On Tuesday, Morgan Stanley withdrew its prediction for a Federal Reserve interest rate cut in March, with Chief US Economist Michael Gapen stating “the on-again-off-again uncertainty around tariffs should elevate the threshold for Fed cuts.”

Read: Trump’s pause on trade tariffs gives emerging markets a break

This assessment followed Chair Jerome Powell’s comments last week indicating that officials are not in a hurry to decrease borrowing costs as they wait for further progress in inflation. The potential for enhanced tariffs complicates this scenario.

What is evident is that the Fed will carefully evaluate the impact of Trump’s policies. San Francisco Fed chief Mary Daly remarked on Tuesday that the US economy is in a favorable position, allowing the central bank to be meticulous in its analysis.

“We don’t need to rush” our decision making, Daly stated, emphasizing that the challenge of reducing inflation to 2% is far from over.

“The Fed must be vigilant regarding inflation risks arising from the proposed tariff strategies,” stated Seema Shah, Chief Global Strategist at Principal Asset Management. “While central banks usually disregard one-time tariff hikes, they need to be cautious of the risk that inflation expectations may begin to rise.”

In Europe, the potential extent of any trade reactions from Trump is critical if tariffs are enforced. Currently, policymakers have minimized their potential effect on prices in either direction.

European Central Bank President Christine Lagarde conveyed that she isn’t “overly worried” about inflation being imported, while Bank of England Governor Andrew Bailey noted that tariff impacts are complex and challenging to predict.

Read: US ether ETFs hit record volume as Trump tariffs rattle market

Inflation within the euro area unexpectedly surged in January, with selling price expectations climbing to the highest in nearly a year for services and the strongest in close to two years for manufacturing.

Consumers and professional forecasters appear less optimistic than policymakers, elevating their inflation outlook for 2025 in ECB surveys. Additionally, a Bloomberg poll indicated that a majority of economists now harbor greater concerns about price pressures exceeding 2% in the medium term.

Even some officials are expressing concern. Chief Economist Philip Lane cautioned on Wednesday that “tensions” in global trade could obscure the inflation outlook, with “new upward risks” potentially emerging. A reassuring note comes from an ECB metric indicating that future wage increases are expected to signal a noticeable slowdown.

In the UK, a Bank of England survey indicated significant pay growth and rising output costs among various businesses for the upcoming year. Conversely, another report stated that one in four service firms raised their prices at the year’s start due to increasing wage costs.

After initiating a tightening cycle last year, Brazil’s central bank is now cautioning that inflation will exceed its acceptable range for the next six months. Meanwhile, Chilean central bankers have voiced that inflation risks have heightened, considering all options are available.

In Asia, despite price levels returning largely within targeted ranges, challenges continue. In Indonesia, consumer prices dropped the most in two decades during January due to a government electricity subsidy, yet core inflation rose more than anticipated, prompting the central bank to intervene to stabilize the rupiah.

Read/listen: SA in Trump’s crosshairs as he sparks global tit-for-tat era

In South Korea, consumer inflation accelerated in January, driven by increased energy and food prices. In Japan, nominal wages saw their most significant surge in nearly three decades in December, reinforcing the Bank of Japan’s recent rate hike decision and aligning with further tightening measures.

In Australia, financial markets and economists anticipate the central bank will initiate an easing cycle on February 18, after holding the cash rate at 4.35% for 13 years since November 2023. However, James McIntyre, who covers Australia and New Zealand for Bloomberg Economics, warns against assuming a rate cut is certain given the robust labor market and continued consumer spending.

Importantly, China remains in a phase of deflation, with weak domestic demand contributing to lower export prices and diminished domestic investment. The likelihood of a worsening trade conflict has economists forecasting further stimulus measures to mitigate the adverse impact on exports.

“We must remember that China, the world’s second-largest economy, continues to experience quasi-deflation,” noted Gilles Moec, chief economist at AXA Investment Managers. “Considering the share of Chinese goods in global trade, this will dampen prices for tradable goods.”

Although uncertainties regarding US tariff levels, their timing, and potential retaliations persist, it is evident that these factors will pressure prices and weaken global growth. Recently, the Bank for International Settlements even warned of stagflation, which combines prolonged high inflation with weak labor markets and sluggish growth—a relatively uncommon occurrence.

Read: Xi weighs retaliation after Trump hits China with 10% tariff

As for the US itself, Aditya Bhave, an economist at Bank of America, cautions that the context and Trump’s actions are not the same as during his previous term in office.

“What makes this situation slightly different from 2018-2019 is the vastly different inflation landscape,” he told Bloomberg Television. “There’s likely greater readiness to pass on costs—especially now that tariffs are being applied to consumer products as well.”

© 2025 Bloomberg

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