Tariffs, trade wars risk stoking world inflation

A Bank of America survey of global fund managers in January showed the re-emergence of global consumer price growth as a key theme for 2025. The World Bank predicted slowing inflation but still warned that it “could prove to be more persistent than expected.”
US, European and Japanese inflation expectations have jumped significantly since Donald Trump emerged as favourite to win US presidency.
And for the US in particular, analysts are openly starting to reassess inflation prospects.
On Feb 4, Morgan Stanley scrapped its forecast for a Federal Reserve interest rate reduction in March, with its Chief US Economist Michael Gapen saying “on-again-off-again tariff uncertainty should raise the hurdle for Fed cuts.”
That followed Chair Jerome Powell’s remarks recently that officials aren’t in a rush to lower borrowing costs as policymakers pause easing to see further progress on inflation.
The potential for increased tariffs complicates that outlook.
The more President Trump threatens tariffs on the US’s trading partners, the more the worry of another inflation wave troubles global economists.
Stubborn consumer price growth was bothering much of the world even before he entered the White House.
Multiple economies now face latent inflation pressures, either domestic or external.
In the US, a resilient labour market is keeping the Fed on alert as Trump’s policies and threats drive bond yields higher. Elsewhere, dollar strength is haunting emerging markets such as Indonesia.
One thing is clear: The Fed will take its time to assess the impact of Trump’s policies.
Across the Atlantic, the extent of any trade response may be key if Trump unleashes tariffs. For now, policymakers have downplayed them as a price driver in either direction.
European Central Bank President Christine Lagarde has argued she isn’t “overly concerned” about importing inflation and Bank of England Governor Andrew Bailey has said tariff effects aren’t straightforward to predict.
But consumers and professional forecasters are less sanguine than policymakers, raising their 2025 inflation outlook in ECB surveys. And a Bloomberg poll showed a majority of economists is now more concerned about price pressures exceeding 2% in the medium term.
Even in Asia, where prices are largely back within target ranges, issues persist.
South Korea’s consumer inflation accelerated in January on the back of higher energy and food prices.
In Japan — where the return of price increases is welcome after decades battling deflation — nominal wages rose at the fastest pace in nearly three decades in December, supporting the Bank of Japan’s latest rate hike decision and keeping the bank on track for further tightening steps.
Trump substantially raised tariffs on steel and aluminium imports on Monday to a flat 25% “without exceptions or exemptions.” The tariffs will apply to millions of tonnes of steel and aluminium imports from Canada, Brazil, Mexico, South Korea and other countries that had been entering the US duty free under the carve-outs.
But US tariffs are an “evolving story” and it is too early to assess their impact on the world economy, International Monetary Fund Managing Director Kristalina Georgieva said yesterday. The outlook for inflation was hard to predict, she suggested.
While there’s still a lot of uncertainty around US tariff levels, their timing and potential retaliation, it’s clear that it’ll not only pressure prices but also weaken growth globally.
A few weeks ago, the Bank for International Settlements even warned of stagflation, a relatively rare mix of persistent high inflation, weak labour markets and tepid growth.
US inflation showed scant signs of downward momentum at the start of the year, while healthy job growth undergirded the economy, backing the Fed’s stance to hold the line on interest rates for now. Moreover, proposed policies from the Trump administration risk keeping inflation elevated.