Goldman Sachs estimates Trump's proposed tariff will increase would enhance inflation by practically 1%
President-elect Donald Trump speaks at the U.S.-Mexico border south of Sierra Vista, Arizona, on August 22, 2024.
Rebecca Noble | Getty Images News | Getty Images
President-elect Donald Trump's latest tariff proposal would likely put upward pressure on inflation in the United States, according to Goldman Sachs.
On Monday, Trump said on the social media site Truth Social that he would impose an additional 10% tariff on goods from China and a 25% tariff on Canada and Mexico. Goldman chief economist Jan Hatzius said in a note that the proposed levies would lead to a significant increase in U.S. consumer prices.
“Our rule of thumb is that all 1 [percentage point] “An increase in the effective tariff rate would increase core PCE prices by 0.1%. We estimate that the proposed tariff increases, if implemented, would increase core PCE prices by 0.9%,” Hatzius said.
“PCE” refers to the Personal Consumption Expenditure Price Index, the Federal Reserve’s preferred measure of inflation.
A tariff-related increase in core PCE could throw off Fed rate cut calculations. October's PCE reading is scheduled to be released on Wednesday and is expected to show a 2.8% year-over-year increase for the core, according to economists surveyed by Dow Jones. In other words, inflation is still above the Fed's 2% target, and tariffs could widen that gap.
Traders have scaled back their expectations for Fed rate cuts in 2025, although it is unclear to what extent this is due to the election results compared to a robust U.S. economy. Fed Chairman Jerome Powell said the central bank would consider the impact of tariffs and other fiscal policy changes on the direction of inflation once the details become clear.
However, it remains to be seen whether the tariffs will actually be implemented at the level proposed by Trump – or what exceptions there might be. The president-elect suggested in his social media post that the tariffs were contingent on changes in immigration policy and the fight against drugs, particularly fentanyl. Some of Trump's advisers and supporters have described the tariffs he proposed during the campaign as a negotiating position rather than settled policy.
For his part, Hatzius said Canada and Mexico were more likely to avoid blanket tariffs than China.
The three countries in question account for 43% of U.S. goods imports, and the tariffs would result in revenue of a little less than $300 billion a year, according to Goldman Sachs calculations.
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