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
Goldman Sachs said President-elect Trump’s latest tariff proposals could put upward pressure on U.S. inflation.
On Monday, Trump said on the social media website Truth Social that he would impose a 10% tariff on goods from China and a 25% tariff on goods from Canada and Mexico. Jan Hatzius, chief economist at Goldman Sachs, said in a report that the proposed taxes would lead to sharp increases in U.S. consumer prices.
“Based on our rule of thumb that a 1 percentage point increase in effective tariffs is associated with a 0.1% increase in core PCE prices, we estimate that if implemented, the proposed tariff increases would increase core PCE prices by 0.9%,” Hatzius said.
“PCE” refers to the personal consumption expenditures price index. Core personal consumption expenditures, which excludes food and energy prices, is the Fed’s preferred inflation data.
Tariff-linked growth in core personal consumption spending could disrupt calculations surrounding a rate cut by the Federal Reserve. Economists surveyed by Dow Jones said October personal consumption expenditures data will be released on Wednesday, and the core data is expected to increase by 2.8% year-on-year. In other words, inflation remains above the Fed’s 2% target, and tariffs could widen that gap.
Traders have been lowering expectations for a rate cut by the Federal Reserve in 2025, although it’s unclear how much of that is due to the election results and a strong U.S. economy. Fed Chairman Jerome Powell said the central bank will consider the impact of tariffs and other fiscal policy changes on the direction of inflation once the details are clear.
To be fair, it remains to be seen whether tariffs will actually be implemented at the levels proposed by Trump, or what exceptions may be made. The president-elect said in his social media post that the tariffs would be conditional on changes in immigration policy and drug enforcement, specifically fentanyl. Some Trump advisers and supporters have described the tariffs he proposed during the campaign as a bargaining position rather than an established policy.
Hatzius said Canada and Mexico appear more likely than China to avoid sweeping tariffs.
The three countries account for 43% of U.S. imports of goods, and the tariffs will result in just under $300 billion in annual revenue, according to calculations by Goldman Sachs.
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