US: Inflationary impact of Chinese tariffs to be modest - TDS

Analysts at TD Securities suggests that as the third $200bn batch of Section 301 tariffs on China has been announced by the Trump Administration, but they expect US inflationary impacts to be modest, along with negative growth impacts.

Key Quotes

“The finalized tariff list still targets a minority share of consumer goods and an even smaller share of the CPI basket. Import market share of the targeted goods is relatively small, and pass-through from capital and intermediate goods prices, which will bear the brunt of the tariff impact, is also low for the relevant categories.”

“We estimate that, at most, the tariffs could add 0.2-0.3pp on US core CPI within 6-12 months. Our base case, however, is that they are likely to only contribute around 0.1pp. The impact on core PCE inflation should be marginally smaller.”

“Any inflationary impacts will have important offsets. For one, disinflationary forces remain in play for core goods prices, which have deflated outright for the past several years.”

“Further, lower global commodity prices and USD appreciation, as a result of trade wars, has deflationary consequences. All told, these factors could easily wipe out positive price impacts.”

“In our view, Fed officials are likely to look past the tariff impacts upon inflation, which will raise annual inflation rates for a 12-month period, as a temporary cost shock — provided inflation expectations remain reasonably well anchored. Indeed, the risk from a sizable increase in tariffs is that they ultimately could depress sentiment, damage supply chains, and result in cuts to capex and hiring. If large enough, these effects might result in a dovish tilt to Fed policy.”