The market has been worried that the trade war may prove inflationary. Higher tariffs would mean higher prices passed along to customers, in turn raising inflation. This is scary because it means the US could get caught in a stagnant economy with higher inflation, which would keep the Fed from cutting. However, the reality is that the trade war may in fact be deflationary instead. The reason why is two-part. Firstly, governments, businesses, and consumers are likely to take actions to off-set the rise in costs; and secondly, the economic toll may hurt the economy so that prices cannot rise.
FINSUM: We do not think tariffs will be inflationary. Thinking of them as automatically inflationary is very narrow-minded, as it does not actually take into account the effects tariffs will have on aggregate demand.
- trade war
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