The latest tariff proposal from President-elect Donald Trump is expected to increase inflation in the United States, as stated by Goldman Sachs. Trump announced on social media platform Truth Social that he plans to impose a 10% tariff on goods from China and a 25% duty on products from Canada and Mexico. According to Jan Hatzius, Goldman’s chief economist, these proposed tariffs would lead to a significant rise in consumer prices in the U.S.
Hatzius explained that based on their estimation, a 0.1% increase in the effective tariff rate would result in a 0.9% boost in core PCE prices if the proposed tariffs are put into effect. The “PCE” refers to the personal consumption expenditures price index, which is the Federal Reserve’s preferred measure of inflation.
The potential tariff-related increase in core PCE could impact the Federal Reserve’s decisions on rate cuts. Economists surveyed by Dow Jones anticipate that the October PCE reading will show a year-over-year core increase of 2.8%, which is above the Fed’s 2% target. This situation could be exacerbated by the tariffs.
There has been a shift in expectations for Fed rate cuts in 2025, with uncertainty about whether this change is due to the election results or the strength of the U.S. economy. Fed Chair Jerome Powell has indicated that the central bank will consider the impact of tariffs and other fiscal policy changes on inflation once more details are available.
It remains uncertain whether the proposed tariffs will be implemented at the levels suggested by Trump or if there will be exceptions. Trump linked the tariffs to changes in immigration policy and drug enforcement, particularly fentanyl, in his social media post. Some of Trump’s advisors view the proposed tariffs as a negotiating tactic rather than a fixed policy.
Hatzius believes that Canada and Mexico are more likely to avoid broad tariffs compared to China. These three countries represent 43% of U.S. goods imports, and the tariffs could generate nearly $300 billion in revenue annually, according to Goldman Sachs’ calculations.
