US Watch – US inflation more than meets the eye, but tariffs less so

Let’s start with the tariffs. Trump’s 25% tariffs on steel and aluminium imports came into force today. Trump reneged on a previous declaration that Canada would even face 50% tariffs and stuck to the initial proposal. In contrast to the 2018 tariffs on aluminium and steel, the levies now extend to goods made from either of them, leading to a total of about $150bn worth of goods being hit, in addition to the roughly $90bn of raw steel and aluminium imports. We’ve previously written about our anticipated impact on the US economy. On a macro scale, the total value of steel and aluminium imports is quite simply not sufficiently substantial to make a real dent in either US growth or inflation. The addition of consumer goods makes the overall impact somewhat bigger, raising the trade-weighted average tariff by 1.8%, but we’re still talking of growth and inflation impacts in the neighbourhood of 0.1pp. The level of tariffs currently applied as of today, is still below the level assumed in our base case of around 11%, but risks of overshooting that assumption are increasing.

On a more granular scale, the substantial tariffs are likely to negatively impact various domestic industries that are reliant on foreign steel and especially aluminium. Over 80% of aluminium in the US is imported, and almost a fifth of steel. This will ultimately have an impact on consumer goods such as cars and canned goods, with almost 40% of aluminium use in the US in transportation the transportation sector, and an additional 20% in packaging, with smaller roles in construction and consumer durables. Retaliatory tariffs, such as those from the EU, are similarly unlikely to have a big impact on the headline macro figures, but will substantially affect targeted sectors. US steel and aluminium producers may see a small boost, similar to the initial impact in 2018 before various exemptions were granted, but this will not reverse decades of decline in the sector.

As for inflation, the 0.2% core and headline m/m CPI inflation rates were a welcome relief after last month’s 0.4 and 0.5%. Core inflation came predominantly from increases in costs of medical care, used cars, and apparel. Food inflation slowed to 0.2% m/m from 0.4% last month. Overall, it seems that disinflation in goods that are heavily exposed to tariffs, such as cars and apparel has stalled. Moreover, the outlook for these categories in upcoming reports shows significant upside risks. Our preliminary nowcast for the February reading of the Fed’s preferred gauge, core PCE, stands at 0.3% m/m, although this number may change in response to tomorrow’s PPI data. The battle against inflation is far from over, with tariff-related upward pressures looming on the horizon. More details will be revealed in the Trump administration’s overall tariff plan, scheduled for April 2nd.