World inflation at risk of rekindling with Trump’s trade war

FRANKFURT – The more US President Donald Trump threatens tariffs on the country’s trading partners, the more the worry of another inflation wave troubles global economists.

Stubborn consumer price growth was bothering much of the world even before he entered the White House. With this week’s measures against China offering the first concrete evidence that Mr Trump is not just jawboning, prospects for at least some escalation and countermeasures elsewhere are forcing analysts to question how far global disinflation can hold.

“Tariff wars are inflationary, that’s not up for debate,” said Mr Carsten Brzeski, ING’s global head of macro research. “In many places, they add to lingering effects from the past inflation shock, as well as big structural challenges” like ageing societies and climate change, he said. “There are currently only very few reasons to expect inflation to remain permanently low.”

While China shows little sign of vulnerability to a price shock for now, the same cannot be said for the rest of the world if some spiral of tariffs unfolds. Multiple economies face latent inflation pressures, either domestic or external. 

In the US, a resilient labour market is keeping the Federal Reserve on alert as Mr Trump’s policies and threats drive bond yields higher. Elsewhere, US dollar strength is haunting emerging markets like Indonesia. Euro zone consumer price growth data this week was faster than expected, and on Feb 6, the Bank of England (BOE) may be forced to raise its forecast for inflation.

Mr Trump’s policies add to pre-existing worries. Despite an International Monetary Fund official declaring in October that the battle against inflation was “almost won”,

attendees at the World Economic Forum in Davos in January had open doubts.

A Bank of America survey of global fund managers in January showed the re-emergence of global consumer price growth as a key theme for 2025. The World Bank predicted slowing inflation, but still warned that it “could prove to be more persistent than expected”. 

That chimes with markets. US, European and Japanese inflation expectations have jumped significantly since Mr Trump emerged as favourite to win the presidency, with all trading above 2 per cent this week. 

For the US in particular, analysts are openly starting to reassess inflation prospects. On Feb 4, Morgan Stanley scrapped its forecast for a Fed interest rate reduction in March.

That followed Fed chairman Jerome Powell’s remarks last week that officials are not in a rush to lower borrowing costs, as policymakers pause easing to see further progress on inflation. The potential for increased tariffs complicates that outlook.

In the euro area, inflation unexpectedly accelerated in January, while selling-price expectations rose to the highest level in almost a year for services, and the strongest in nearly two years in manufacturing. 

European Central Bank (ECB) chief economist Philip Lane warned on Feb 5 that “friction” in global trade could muddy the outlook for inflation, and “new upside risks” could emerge. Offering some comfort is an ECB gauge of future wage increases that continues to signal a sharp slowdown.

In Britain, a BOE survey of small, medium and large businesses flagged elevated pay growth and output costs for the year ahead. A separate report on Feb 5 showed one in four of services firms hiked prices at the start of 2025 amid rising wage bills.

Even in Asia, where prices are largely back within target ranges, issues persist. In Indonesia, headline consumer prices fell the most in 20 years in January due to a government electricity subsidy, but core inflation picked up more than expected and the central bank has been forced to intervene to prop up the rupiah.

South Korea’s consumer inflation accelerated in January on the back of higher energy and food prices, data showed on Feb 5. And in Japan – where the return of price increases is welcome after decades battling deflation – nominal wages rose at the fastest pace in nearly three decades in December, supporting the Bank of Japan’s latest rate hike decision and keeping the bank on track for further tightening steps. 

To be sure, China does remain in a period of deflation, with weak domestic demand fuelling cheaper exports and less investment at home. The prospect of a deepening trade war has economists expecting additional stimulus moves to offset the potential drag on exports. 

“We should never forget that the world’s second-biggest economy, China, continues to wallow in quasi-deflation,” said Mr Gilles Moec, chief economist at AXA Investment Managers. “Given the share of Chinese products in world trade, this should be a source of global dampening in tradeable goods prices.”

As for the US itself, Bank of America economist Aditya Bhave cautions that the backdrop and Mr Trump’s measures are not the same as they were during his first term in office. 

“The concern here that maybe makes it a little bit different from 2018 to 2019 is that we’re in a very different environment in terms of inflation,” he told Bloomberg Television. “There’s probably more willingness to pass costs on – and also this time, at least for now, the tariffs have also been applied to consumer goods.”

While there’s still a lot of uncertainty around US tariff levels, their timing and potential retaliation, it is clear that it will not only pressure prices but also weaken growth globally. A few weeks ago, the Bank for International Settlements even warned of stagflation – a rare mix of persistent high inflation, weak labour markets and tepid growth. BLOOMBERG