Economists have warned that the tariffs President Donald Trump plans to introduce on imports from Canada, Mexico, and China could spark inflation and negatively impact an economy that has been performing steadily.

Ryan Sweet, chief U.S. economist at Oxford Economics, predicts that the Federal Reserve’s preferred inflation rate, which was at 2.8% in December, could rise to 3% by year’s end. He previously expected it to decrease to around 2.2%, close to the Fed’s target of 2%, if the tariffs were not implemented.

This core inflation rate— which omits food and energy prices and reflects lasting trends—has decreased from a peak of 5.6% in early 2022, a rise driven by pandemic-related supply chain disruptions coupled with increased consumer demand.

Some economists anticipate an even larger inflationary effect from the tariffs. Analysts at Deutsche Bank foresee an increase of over one percentage point.

What Are Tariffs in Simple Terms?

Tariffs are essentially taxes levied on imported goods entering the U.S. These costs are borne by American manufacturers or retailers but are typically passed on to consumers. However, as imports decrease due to tariffs, this might fortify the U.S. dollar, making imported goods cheaper for buyers and partially counteracting the impact of the tariffs, according to Sweet.

Additionally, companies might absorb some of the tariff costs within their profit margins, which could lessen the burden on consumers.

Sweet noted that while these factors could reduce “some but not all” of the tariff’s impact, the levies will still elevate inflation pressures.

How Do Tariffs Affect the Economy?

The introduction of these tariffs is expected to reduce overall economic growth by approximately 1.2 percentage points in 2023, dropping from a projected 2.6% to 1.4%, Sweet estimates. Increased prices resulting from the tariffs are likely to cause consumers to cut back on spending. Additionally, retaliatory tariffs from the affected nations could hurt U.S. exports, negatively impacting American manufacturers.

Canadian Prime Minister Justin Trudeau stated on Friday that Canada would respond decisively and swiftly.

“It’s not our preference, but if he proceeds, we will also take action,” he stated in comments made during a televised address.

This could lead to a notable decline in economic growth from the previously announced figure of 2.8% for 2024, as reported by the Commerce Department. Interestingly, even before the tariffs are enacted, they may have already influenced consumer spending in the last quarter by encouraging Americans to purchase items like furniture and appliances ahead of time, boosting late-year consumption, according to Sweet.

Slower economic growth typically results in a weaker job market. The unemployment rate is expected to average 4.5% this year, which is 0.3 percentage points higher than it would have been without the tariffs, Sweet remarked.

Meanwhile, Deutsche Bank has forecasted a smaller knock to growth of approximately 0.3 percentage points.

The overall impact of the proposed tariffs could be lessened with certain exemptions. On Friday, Trump mentioned that the tariff on Canadian oil imports would likely be 10% instead of 25%. Sweet also suggested that there might be exemptions for imports like lumber from Canada, agricultural products from Mexico, and auto-related goods from both nations.

What Does the U.S. Import from Canada and Mexico?

The implications of these duties on the U.S. economy and inflation are significant, given that Canada, Mexico, and China are the largest trading partners of the United States. According to Trading Economics, the U.S. imported $480 billion worth of goods from Mexico last year, which included vehicles, electrical machinery, furniture, plastics, and metals.

In the same fashion, the U.S. imported $429 billion from Canada, encompassing vehicles, oil, machinery, wood, metals, and pharmaceuticals, as per Trading Economics data.

Tariffs could particularly disrupt the automobile sector, as it relies on raw materials sourced from Mexico to produce parts that are later sent back for vehicle assembly, noted Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in previous statements to YSL News.

Contributing: Joey Garrison, YSL News; Reuters