President-elect Donald Trump addresses a gathering at the U.S.-Mexico border near Sierra Vista, Arizona, on August 22, 2024.
Rebecca Noble | Getty Images News | Getty Images
On Monday, Trump revealed on the social media platform Truth Social that he plans to implement a 10% tariff on imports from China and a 25% tariff on goods from Canada and Mexico. According to Jan Hadzius, Goldman’s chief economist, these proposed tariffs are expected to lead to a considerable rise in consumer prices across the United States.
“Using the guideline that a 1% rise in the effective tariff typically equates to a 0.1% increase in core PCE prices, we predict that core PCE prices could rise by 0.9% if these tariff hikes take effect,” Hadzius stated. “I am confirming this analysis,” he added.
The term “PCE” refers to the Personal Consumption Expenditures Price Index, the Federal Reserve’s primary inflation gauge.
Increases in core PCE due to these tariffs could complicate the Fed’s decision-making regarding interest rate cuts. The PCE data for October is set to be released on Wednesday, with economists polled by Dow Jones anticipating a year-on-year rise of 2.8% in the core sector. This indicates that inflation continues to exceed the Fed’s target of 2%, and tariffs could widen this disparity.
Market traders are now reconsidering their predictions about potential interest rate cuts by the Fed in 2025, though it remains unclear whether this change is influenced more by the recent election results or the strength of the U.S. economy. Fed Chairman Jerome Powell has indicated that the Fed will evaluate the implications of tariffs and other fiscal policies on inflation as new information emerges.
However, it is still uncertain whether Trump will actualize the suggested tariffs at the proposed rates or what exemptions might be considered. The president-elect mentioned in various social media updates that the tariffs may be linked to modifications in immigration policy and the enforcement of drug laws, especially concerning fentanyl. Some of Trump’s advisors and supporters view the tariffs discussed during the campaign as part of negotiation strategies rather than definitive policy.
According to Hadzius, it is more probable that Canada and Mexico will escape the full extent of the tariffs compared to China.
Goldman Sachs estimates that the three affected countries represent 43% of U.S. imports and could potentially generate nearly $300 billion annually in tariff revenue.
