The tariffs that President Donald Trump imposed Saturday on imports from Canada, Mexico and China are likely to reignite inflation and deal significant blows to an economy that has been chugging along, economists said.
Those tariffs are set to go into effect Tuesday, with one exception: Mexico and the United States reached a deal to pause the levies on the the States' southern neighbor for one month. By early afternoon Monday, Trump's 25% tariff on Canadian goods and a 10% tariff on Chinese goods still appeared on course to begin Tuesday.
The Federal Reserve’s preferred annual inflation measure, which was at 2.8% in December, would rise to 3% by the end of the year as a result of the tariffs, estimates Ryan Sweet, chief U.S. economist for Oxford Economics. Sweet had expected the reading to fall to 2.2%, close to the Fed’s 2% goal, without the import duties.
That gauge of core inflation, which excludes food and energy items and reflects more sustainable trends, has tumbled from a high of 5.6% in early 2022 that was spurred by pandemic-related supply chain troubles and a burst of consumer demand.
Some economists have forecast a bigger impact of the tariffs on inflation. Deutsche Bank has projected a more than percentage point rise.
What are tariffs in simple terms?
Tariffs, which are taxes on foreign goods shipments to the U.S., are paid by domestic manufacturers or retailers and typically passed along to consumers. But because they’ll reduce imports, they likely would strengthen the dollar, making foreign goods less expensive for consumers and partly offsetting the direct effects of the levies, Sweet said.
Companies also could partly absorb the cost of the tariffs in their profits, mitigating the consumer impact.
Those measures would lessen “some but not all of the impact of the tariffs,” Sweet said. The duties still “will put upward pressure on inflation.”
How do tariffs affect the economy?
The tariffs, meanwhile, also would lower economic growth by a hefty 1.2 percentage points this year, from 2.6% to 1.4%, Sweet estimated. The higher costs would force consumers to reduce their overall spending. And likely retaliatory tariffs from the countries affected would dampen U.S. exports, hobbling American manufacturers.
Canadian Prime Minister Justin Trudeau said Friday his country would forcefully and immediately respond.
"It's not what we want, but if he moves forward, we will also act," he said in televised remarks.
China has also promised "countermeasures."
That would amount to a substantial drop in economic growth from 2.8% in 2024, a performance the Commerce Department announced this week. Yet even before they took effect, the tariffs likely affected consumer spending in the fourth quarter by prompting Americans to buy furniture, appliances and other goods before the levies go into effect, boosting consumption late last year, Sweet said.