Deutsche Bank: If the U.S. imposes a 25% tariff on Canada and Mexico, the inflation indicator favored by the Federal Reserve may rise by 1.4%
Deutsche Bank AG predicts that if the United States imposes a 25% tariff on Canada and Mexico, it will lead to a 1.4% increase in the core Personal Consumption Expenditures (PCE) price index. Analysts point out that Trump may take action on February 1, and if the tariffs are implemented, the core PCE price level is expected to rise significantly, putting greater inflationary pressure on the Federal Reserve
According to Zhitong Finance, on Monday, Trump stated that he might impose a 25% tariff on imports from Canada and Mexico as early as February. According to data from the U.S. Census Bureau, in November 2024, Mexico and Canada are the two largest trading partners of the United States, accounting for 15.4% and 13.8% of total trade, respectively. In light of the potential 25% tariff, Deutsche Bank has re-evaluated a previous analysis report regarding the possible impact of tariffs on U.S. inflation.
In November of last year, Deutsche Bank analysts Justin Weidner and Matt Luzzetti estimated that a 25% tariff imposed by the U.S. on Mexico and Canada could lead to an increase of about 1 percentage point in the core Personal Consumption Expenditures (PCE) price index by 2025. The core PCE price index is widely regarded as the inflation indicator preferred by the Federal Reserve.
Deutsche Bank analyst Jim Reid stated on Tuesday, "At that time, most people thought this was a negotiation tactic. However, the last-minute extension of negotiations for the 25% tariff indicates that we should take this threat more seriously, even though there is still time to reach an agreement. Trump hinted that he might take action as early as February 1, so believing his words could be significant 11 days later. Imports from Canada and Mexico account for about 4.7% of total personal consumption expenditures and 5.4% of core consumption expenditures in the U.S. If the additional 25% tariff permeates all stages of production, the core PCE price level is expected to rise by 1.4% (5.4% multiplied by 25%)."
Reid added, "If the transmission is 50%, the forecast for the core PCE price index in 2025 would increase by about 80 basis points, and if it is 75%, the forecast would increase by about 110 basis points. Therefore, strong core inflation heating up will be a further headache for the Federal Reserve."
