If newly re-elected U.S. President Donald Trump follows through on his campaign promises to cut taxes, crack down on immigration, and hike tariffs on all imported goods, inflation is likely to rise both in the United States and globally.
With a Republican majority in the U.S. Senate, Trump’s historic re-election—projected by CNN on Wednesday—puts the former president in a strong position to implement his potentially radical economic agenda.
U.S. stock markets opened sharply higher, buoyed by Trump’s decisive victory. Treasury yields—market interest rates—spiked, and the dollar rallied against major currencies, partly because traders are pricing in higher domestic inflation, which could lead to fewer interest rate cuts by the Federal Reserve. (Higher interest rates tend to increase a currency’s value as foreign investors seek higher returns.)
Trump’s proposed economic policies—including deporting immigrants, implementing across-the-board tariffs, and increasing political influence on the Federal Reserve—would, if fully implemented, “likely lead to a substantial decrease” in U.S. economic output and “a large increase in inflation,” said Antonio Fatás, an economics professor at INSEAD, a business school in France.
Susannah Streeter, head of money and markets at the investment platform Hargreaves Lansdown, echoed similar views. The stronger dollar reflects expectations that Trump will cut taxes, hike tariffs, and clamp down on immigration—all inflationary measures likely to result in elevated interest rates in the years to come, she wrote in a note on Wednesday.
“Investors are bracing for tariffs… which will push up the price of imported goods for American shoppers,” she added. Trump’s “vow to kick out immigrants with waves of deportations could also have economic ramifications, potentially pushing up wage bills for companies.”
Taxing Imports
On the campaign trail, Trump proposed a 10-20% tariff on all imported goods—a sharp increase from the current average of 2%, or in many cases, zero. For Chinese imports, he suggested an even steeper tariff of at least 60%. Additionally, he floated a 100% or 200% tariff on cars made in Mexico or on products made by companies that shift manufacturing from the U.S. to Mexico.
Tariffs act as a tax on imports, harming consumers and businesses that rely on imported raw materials and intermediate goods needed to make finished products.
“We now expect just one Fed rate cut in 2025, with (monetary) policy on hold until the realized inflation shock from tariffs has passed,” wrote analysts at Nomura in a note on Wednesday.
The impact of Trump’s tariffs will be felt far beyond U.S. borders. If America’s trading partners retaliate with their own tariffs on U.S. imports, “a material increase in global inflation would follow, while the ensuing hit to world trade would negatively impact (economic) growth,” said Investec chief economist Philip Shaw and economist Ellie Henderson.
A stronger dollar could also put upward pressure on inflation globally. “As the dollar rises, countries that import commodities priced in USD may also see price increases, which will either need to be absorbed by companies or passed on to customers,” said Streeter.
On the other hand, disinflation could be reinforced in economies with lower tariff levels than in the U.S. if it means China dumps its excess goods in these countries, said Anthony Kettle, a senior emerging markets portfolio manager at RBC Global Asset Management.
China and Germany at Risk
BMI, a market research firm owned by Fitch Solutions, argues that Mexico and Canada may be in the “direct firing line” when it comes to tariffs because their economies rely heavily on exports to the U.S.
“We also believe that Trump could decide to implement even higher tariffs on economies that run large trade surpluses with the U.S.,” BMI analysts wrote in a note on Wednesday. Mexico runs a large trade surplus with its northern neighbor and, together with countries like China, Japan, Germany, and South Korea, “could come under more pressure to boost demand for U.S. goods.”
BMI also said that a 60% tariff on Chinese goods would hit China’s economic growth by between 0.5 percentage points and 0.8 percentage points over the next two years.
German exporters, for whom the U.S. is the largest market outside of the European Union, should also expect “severe losses” if Trump imposes a 20% tariff on all trading partners, warned the Munich-based Ifo Institute for Economic Research on Wednesday.
The institute estimates that German exports to the U.S. could plunge by around 15% as a result. “Donald Trump’s economic course will pose major problems for Germany and the European Union,” the institute said.