Trump's Reciprocal Tariffs Could Push US Inflation Up by 2% by Year-End

Experts predict Trump's tariff policies will significantly impact consumer prices in the US / EPA

There is growing concern that the full implementation of Donald Trump’s proposed reciprocal tariffs could exert significant upward pressure on inflation in the United States. According to recent reports, if these tariffs come into effect, they may raise consumer prices in the US by as much as 2 percentage points by the end of 2025, nearly doubling the current inflation target set by the Federal Reserve.

On February 15, 2025, Trump reaffirmed his decision to impose reciprocal tariffs in a post on his social media platform, Truth Social. In his statement, he emphasized that countries employing value-added tax (VAT) systems, such as South Korea, Europe, and Japan, would be treated similarly to those with tariffs on US goods. Since most of the US's major trade partners—including European nations, Japan, and South Korea—use VAT, this could significantly affect a broad range of products imported into the US.

A senior economist at Capital Economics, Paul Ashworth, noted in a memo to investors that the tariff assessments would not only take into account the tariffs imposed by foreign countries on US exports but also their VAT systems. Ashworth highlighted that while the average tariff rate on imports to the US is currently about 2.6%, the 15 largest trade partners of the US apply an average tariff of 6.7% on US exports. This discrepancy, coupled with VAT, could lead to significantly higher tariffs on imports.

According to Ashworth’s projections, if the tariffs are applied as Trump has outlined, the average tariff on goods entering the US could surge from its current level of under 3% to approximately 20%. This would be a substantial increase in trade costs for US businesses, leading to higher prices for consumers.

Experts predict that such an increase in tariffs could push US consumer prices up by roughly 2% by the end of the year, based on current inflationary trends. As of December 2024, the Personal Consumption Expenditures (PCE) index—a key measure of inflation—showed a year-on-year increase of 2.6%. With the added impact of these tariffs, some analysts estimate that the PCE could rise to as high as 4.6% by the end of 2025.

However, some economists believe that the full impact of these tariff hikes may not be passed entirely onto consumers. Justin Widener, an economist at Deutsche Bank, suggests that it’s likely that importers in the US would absorb about half of the tariff increases, with the remaining portion being passed on to consumers. In this scenario, the additional inflationary pressure from tariffs would add about 1 percentage point to the current inflation rate.

Despite the uncertainty surrounding the exact effects, the economic impact of these reciprocal tariffs is expected to be substantial. Gary Huffbauer, an economist at the Peterson Institute for International Economics, warned that if Trump’s tariff policy is fully implemented, it would cause significant economic disruption in the US and could lead to considerable inflationary pressure. This, in turn, would affect both the domestic market and international trade dynamics, further complicating efforts to manage inflation and economic growth.

As the situation unfolds, analysts are closely monitoring the potential ramifications of these tariffs on the broader economy, especially considering that such policy shifts could have long-lasting effects on consumer behavior, corporate pricing strategies, and international relations.