- US inflation has been gradually rising since September 2024, and is currently 3%
- Inflation in the US is 70% likely to remain above the 2% target within the next 12 months3
- The 2018 tariffs imposed by the US raised the average price of US manufacturing by approximately 1%2
Tariffs increase the cost to a domestic consumer of a foreign good, usually designed to limit consumption of that good, by making locally manufactured comparable products more appealing. They can preserve and support a country’s own industry, address trade imbalances with others to avoid any over reliance and support earlier stage sectors that are not yet price competitive by encouraging them to grow and innovate without such pressure1.
Though tariffs can be issued with these intentions, their economic and business effects can be costly and multifaceted. They could create an inflationary effect where demand is inelastic, sectorial efficiency could reduce in the medium term as less competitive companies are insulated from the forces of demand and supply and in the long-term resources may be misallocated, staggering innovation, and dampening economic growth potential1.
President Trump’s agenda creates uncertainty around the future macroeconomic environment, and we can see inflation forecasts (somewhat due to the heightened use of tariffs) being impacted in real time. The likelihood of inflation being reported above target (2%) has been on a sharp increase since last autumn as shown on the below graph and has now reached a 70% probability – the highest level since Q1 2023.
Source: Numera Analytics, 2025
Bowmore portfolios
While tariffs were mentioned repeatedly during Trumps campaign, far fewer than promised have come into force thus far – and we believe that the threat of them has broadly been used as a negotiation tool with other countries. A lower than initially suggested 10% tariff on Chinese goods has come into force, with Mexico and Canada’s widescale tariffs being delayed. A 25% tariff has been announced on aluminium and steel imports to take affect from 12 March, but with others being delayed or dropped at the last minute, we will reserve comment until it takes effect.
During heightened terms of trade uncertainty and risk of inflation, we emphasise the importance of a diversified portfolio as well as taking a long-term view, tactically allocating to areas of the market that are not wholly dependent on exporting their goods to the US or are actually set to benefit from such tariffs. We recently wrote an article on China, exploring our belief that the effect of tariffs wouldn’t be as damaging as one might imagine, and despite the 10% tariff taking effect earlier this month, our Chinese equity exposure within core portfolios has returned 6.4% year to date.
Source: LSEG DataStream, data as at 20/02/2025
1 State Street, 2025
2 Amiti et al., 2019
3 Numera Analytics, 2025
The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance.
