Why Trump’s return could spark another bout of inflation and delay interest rate cuts

Inflation is likely to rise in the United States and around the world if newly elected US President Donald Trump follows through on his campaign promises to cut taxes, crack down on immigration and hike tariffs on all imported goods.

Together with a Republican majority in the US Senate, Trump’s historic reelection, which CNN projected Wednesday, puts the former president in a strong position to implement his potentially radical economic agenda.

US stock markets opened sharply higher, buoyed by Trump’s decisive victory. Treasury yields — or market interest rates — spiked, while the dollar has rallied against major currencies, partly as traders price in higher domestic inflation and therefore fewer interest rate cuts by the Federal Reserve. (Higher interest rates tend to boost the value of a currency by attracting more capital from abroad as investors seek bigger returns.)

Trump’s proposed economic policies — including deporting immigrants, across-the-board tariffs and increased political influence on the Fed — would, if fully implemented, “likely lead to a substantial decrease” in US economic output and “a large increase in inflation,” said Antonio Fatás, an economics professor at INSEAD, a business school headquartered in France.

Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown, echoed some of these views. The stronger dollar reflects expectations that Trump will cut taxes, hike tariffs and clamp down on immigration, which are all inflationary and likely to mean more elevated interest rates in the years to come, she wrote in a note Wednesday.

“Investors are bracing for tariffs… which will push up the price of imported goods for American shoppers,” she added. Trump’s “vow to kick out immigrants with waves of deportations could also have economic ramifications, potentially pushing up wage bills for companies.”

On the campaign trail, Trump proposed a 10-20% tariff on all imported goods — a sharp increase from the current average of 2% or, in many cases, zero. For Chinese imports, he has proposed an even steeper tariff of at least 60%. Plus, he has floated a 100% or 200% tariff on cars made in Mexico or on the products made by companies that move manufacturing from the US to Mexico.

Tariffs act as a tax on imports, hurting consumers as well as businesses that rely on imported raw materials and so-called intermediate goods needed to make finished products.

“We now expect just one Fed cut in 2025, with (monetary) policy on hold until the realized inflation shock from tariffs has passed,” Nomura analysts wrote in a note Wednesday.

The pain of Trump’s tariffs will be felt far beyond US borders. If America’s trading partners retaliate with their own tariffs on US imports, “a material increase in global inflation would follow, while the ensuing hit to world trade would negatively impact (economic) growth,” said Investec chief economist Philip Shaw and economist Ellie Henderson.

A stronger dollar could also put upward pressure on inflation globally. “As the dollar rises, countries that import commodities priced in USD may also see price increases, which will either need to be absorbed by companies or passed on to customers,” said Streeter.

On the other hand, disinflation could be reinforced in economies with lower tariff levels than in the US if it means that China dumps its excess goods in these countries, said Anthony Kettle, a senior emerging markets portfolio manager at RBC Global Asset Management.

BMI, a market research firm owned by Fitch Solutions, argues that Mexico and Canada may be in the “direct firing line” when it comes to tariffs because their economies rely heavily on exports to the US.

“We also believe that Trump could decide to implement even higher tariffs on economies that run large trade surpluses with the US,” BMI analysts wrote in a note Wednesday. Mexico runs a large trade surplus with its northern neighbor and, together with countries such as China, Japan, Germany and South Korea, “could come under more pressure to boost demand for US goods.”

BMI also said that a 60% tariff on Chinese goods would hit China’s economic growth by between 0.5 percentage points and 0.8 percentage points over the next two years.

German exporters, for whom the US is the single largest market outside of the European Union, should also expect “severe losses” if Trump imposes a 20% tariff on all trading partners, the Munich-based Ifo Institute for Economic Research warned Wednesday.

The institute estimates that German exports to the US could plunge by around 15% as a result. “Donald Trump’s economic course will pose major problems for Germany and the European Union,” the institute said.