Goldman Sachs has raised concerns over potential inflationary pressures in the U.S. due to the latest tariff proposals by President-elect Donald Trump. Trump announced via social media plans to impose an additional 10% tariff on Chinese imports and a 25% tariff on goods from Canada and Mexico. Jan Hatzius, Goldman Sachs' Chief Economist, highlighted in a report that these tariffs could significantly raise consumer prices in the U.S.
According to Hatzius, for every 1% increase in the effective tariff rate, the core Personal Consumption Expenditures (PCE) price index could rise by about 0.1%. If Trump's tariff proposals are implemented, core PCE prices might increase by 0.9%. The PCE is the Federal Reserve's preferred measure of inflation. Currently, the market expects core PCE to grow by 2.8% year-on-year, already above the Fed's 2% target. Implementing these tariffs could widen the gap between actual inflation and the target, influencing the Fed's future interest rate decisions.
Traders have already reduced expectations for Fed rate cuts in 2025, though it's unclear if this is due to the U.S. economy's resilience or the election results. Fed Chair Jerome Powell has indicated that the central bank will consider the impact of tariffs and other fiscal policy changes on inflation once policy details are clear.
Despite the announcement, there is skepticism about whether the tariffs will be fully implemented as proposed. Trump mentioned that tariff implementation would depend on changes in immigration policy and drug control, particularly fentanyl. Advisers and supporters suggest these tariffs might be more of a negotiation tactic than a fixed policy.
Goldman Sachs believes Canada and Mexico might avoid comprehensive tariffs, while China faces higher risks. The combined imports from Canada, China, and Mexico account for 43% of U.S. imports. If fully implemented, the tariffs could generate nearly $300 billion annually in revenue but may negatively impact consumer prices, supply chains, and the overall economy.
