CITIC Securities Co., Ltd.: What is the impact of Trump's tariff policy on U.S. inflation?

According to the Zhitong Finance APP, CITIC Securities has released a research report stating that the current round of Trump’s tariff policy is characterized by its universality and significant increase in tax rates. Moreover, American companies generally possess a strong willingness and ability to pass on costs, and the cost pressure brought by tariffs is expected to gradually transmit to downstream consumers. Currently, some forward-looking indicators of inflation in the United States have shown warning signals of rising inflation. The inflation pressure in the U.S. cannot be ignored, and the upward trend of inflation in the U.S. may gradually become apparent in the second half of the year.

CITIC Securities' main viewpoints are as follows:

Detailed Explanation of Key U.S. Inflation Indicators:

1. The U.S. Consumer Price Index (CPI) is compiled monthly by the U.S. Bureau of Labor Statistics (BLS) and is one of the important indicators for measuring changes in urban consumer prices. The BLS constructs the CPI index through monthly tracking of the prices of a basket of representative consumer goods and services to reflect the changing trends in the consumption costs of U.S. residents. The BLS collects about 100,000 price samples from approximately 26,000 retailers and 4,000 housing units in about 87 urban areas each month, covering major categories such as food, energy, housing, transportation, and healthcare. The specific classification methods for the U.S. CPI include the eight-fold and three-fold methods.

2. The U.S. Personal Consumption Expenditures (PCE) price index is published by the U.S. Bureau of Economic Analysis (BEA) and is a key inflation indicator for the Federal Reserve in formulating monetary policy. The PCE index is based on various business survey data from the U.S. Census Bureau, such as retail trade and service industry surveys, and has a broader statistical scope, reflecting the true consumption structure of the overall economy. The weights used to calculate the PCE price index are dynamically updated quarterly, allowing it to sensitively capture the substitution effects between goods and services. Its dynamic characteristics in statistical scope and weighting mechanism enhance its reference value in policy formulation.

During the Trump administration from 2017 to 2018, tariffs were imposed on Chinese goods, as well as steel and aluminum products. Although this temporarily raised the prices of some imported goods in the U.S., it did not create systemic inflation risks, which was driven by multiple factors.

1. The total value of goods subject to tariffs during Trump’s first term was relatively small compared to the current round of tariff policies. The value of goods subject to tariffs on China during the 2017-2019 round of Trump tariffs was less than $400 billion, and the value of goods subject to tariffs on steel and aluminum was around $50 billion, thus having a relatively limited impact on overall U.S. inflation;

2. The U.S. dollar strengthened during the period of tariff implementation, and the relative depreciation of non-U.S. currencies offset the cost increase pressure;

3. At that time, the inflation risk in the U.S. was primarily due to insufficient inflation momentum, with inflation growth at a low level of around 2%. The Federal Reserve was attempting to raise inflation levels rather than suppress them;

4. The increase in import costs due to U.S. tariffs was partially absorbed internally by exporting country enterprises, U.S. importers, or distributors through profit compression;

5. The marginal substitution of consumer behavior in the U.S. also played a buffering role;

6. Many U.S. companies stockpiled goods in advance, effectively delaying the transmission of tariff impacts to end prices. These factors combined meant that although tariffs during Trump’s first term caused disturbances in the prices of some goods, they did not lead to a trend-driven increase in U.S. inflation Although the scale of goods affected by tariffs during Trump's first term was limited and U.S. inflation did not rise significantly, retrospective calculations indicate that Trump's tariff policy did have a certain upward effect on U.S. inflation.

The report from the U.S. International Trade Commission shows that the tariffs implemented under Section 301 from 2017 to 2018 pushed domestic product prices in the U.S. up by 0.2%. Additionally, the Boston Federal Reserve's assessment of the impact of tariffs on overall inflation in 2018 indicated that the tariffs contributed 0.1 to 0.2 percentage points to the core PCE index of the Federal Reserve, while the average U.S. import tariff rate increased by 1% in 2020 compared to 2018.

What is the impact of this round of Trump's tariff policy on U.S. commodity prices and inflation?

Currently, it is important to note that with persistent inflation in services such as housing, the inflation rate of core commodities is gradually rising under the influence of tariff policies, and signs of increasing inflation pressure in the U.S. are becoming apparent. Since U.S. companies generally have a strong willingness and ability to pass on costs, the cost pressure brought by tariffs is expected to gradually transmit to downstream consumers. The implementation of universal tariffs in the U.S. will create upward pressure on U.S. PCE inflation. Alberto Musalem, President of the Federal Reserve Bank of St. Louis, also stated during a roundtable discussion in Paducah, Kentucky on March 26 that if the effective tariff rate in the U.S. were to be raised by 10 percentage points, it could lead to an increase in U.S. PCE inflation levels by as much as 1.2 percentage points. The latest calculations from the Yale Budget Lab on July 28 show that Trump's tariff policy (as of Trump's statements and signed executive orders up to July 27) will cause U.S. prices to rise by 1.8% in the short term.

Currently, some forward-looking indicators of U.S. inflation have shown warning signals of rising inflation.

Historically, the price component of the U.S. ISM Manufacturing PMI typically leads the U.S. CPI year-on-year by about six months. The price component index of the U.S. PMI has started to rebound since the end of 2023 and is expected to accelerate in 2025. This indicator has remained above 69 for nearly four consecutive months (from March to June 2025), suggesting that the U.S. ISM Manufacturing PMI price component may indicate that inflation pressure in the U.S. will gradually emerge in the second half of this year. Specifically, leading signals from food and used car prices also indicate that U.S. inflation will face upward pressure.

Risk factors:

U.S. economic changes exceeding expectations; Trump administration policies exceeding expectations; U.S. monetary policy exceeding expectations; geopolitical risks exceeding expectations, etc