CITIC SEC: How will Trump's tariff policy affect inflation in the United States?

CITIC Securities released a research report stating that the current Trump tariff policy has the characteristics of universality and a substantial increase in tax rates. Furthermore, American companies generally have a strong willingness and ability to transfer costs, and the cost pressure brought by tariffs is expected to gradually transmit downstream to the consumer end. Some leading indicators of inflation in the United States have shown warning signals of inflation beginning to rise, and the inflation pressure in the United States should not be ignored. The upward trend in inflation in the United States in the second half of the year may gradually become more apparent. The main points of CITIC Securities are as follows: Detailed analysis of key inflation indicators in the United States: 1) US Consumer Price Index (CPI) Compiled monthly by the Bureau of Labor Statistics (BLS), CPI is an important indicator measuring changes in consumer prices in urban areas. The BLS constructs the CPI index by tracking prices of a representative basket of goods and services monthly to reflect the changing trend of consumer costs for US residents. The BLS collects around 100,000 price samples from approximately 26,000 retail stores and 4,000 housing units in about 87 cities every month, covering major categories such as food, energy, housing, transportation, and healthcare. The US CPI has specific classification methods, including the eight-category method and the three-category method. 2) US Personal Consumption Expenditures Price Index (PCE) is published by the Bureau of Economic Analysis (BEA) and is a key inflation indicator for the Federal Reserve's monetary policy. The PCE index is based on various business survey data from the Census Bureau, such as retail trade and service industry surveys, and has a broader statistical coverage that can reflect the true consumption structure of the overall economy. The weights used to calculate the PCE price index are updated quarterly, allowing it to capture substitution effects between goods and services sensitively. The dynamic features of its statistical coverage and weight mechanism give it higher reference value in policy-making. The Trump administration implemented tariffs on Chinese goods, steel, and aluminum products in 2017-2018. Although this temporarily raised prices of some imported goods in the US, it did not pose systemic inflation risks due to various factors driving it: 1) The total value of goods subject to tariffs in Trump's first term was relatively small compared to this round of tariff policy. The amount of goods subject to tariffs on China during Trump's tariffs from 2017 to 2019 was less than $400 billion, and the amount of goods subject to steel and aluminum tariffs was around $50 billion, thus the impact on overall US inflation was relatively limited. 2) The US dollar strengthened in certain periods during the tariff implementation, and the depreciation of non-US currencies offset the pressure of cost increase. 3) At that time, the US inflation risk was due to insufficient inflation momentum, with inflation growth rates around 2%, and the Federal Reserve was trying to raise the inflation level rather than suppress it. 4) The increase in import costs due to US tariffs was partially absorbed internally through profit compression by exporting country enterprises, US importers, or distributors. 5) Marginal substitution behavior of US consumers also acted as a buffer. 6) Many US companies stocking up inventory ahead of time effectively delayed the transmission of tariff impact to end prices. These factors combined to ensure that although Trump's first term tariffs caused disruptions in prices of some goods, they did not lead to a trend of rising inflation in the US. Although the scale of goods subject to tariffs in Trump's first term was limited and US inflation did not significantly rise, retrospectively speaking, the Trump tariff policy did have a certain impact on US inflation. A report from the US International Trade Commission analysis showed that the tariffs on Section 301 implemented in 2017-2018 led to a 0.2% increase in prices of domestic products. Furthermore, an assessment of the overall inflation impact of tariffs by the Boston Federal Reserve in 2018 revealed that the tariffs contributed 0.1 to 0.2 percentage points to the core PCE index, and the average import tariff rate in the US increased by 1% in 2020 compared to 2018. What will be the impact of the current Trump tariff policy on US product prices and inflation? Currently, under the background of sticky inflation in services such as housing, the core commodity inflation rate is gradually increasing under the influence of tariff policies, indicating an initial increase in inflation pressure in the US. As American companies generally have a strong willingness and ability to transfer costs, the cost pressure brought by tariffs is expected to gradually transmit downstream to the consumer end. The implementation of universal tariffs in the US will put upward pressure on US PCE inflation. Albert Musalem, President of the St. Louis Federal Reserve, also stated in a roundtable discussion held on March 26 in Paducah, Kentucky, that if US effective tariff rates were raised by 10 percentage points across the board, it could lead to an increase of up to 1.2 percentage points in US PCE inflation. The latest calculations from the Yale Budget Lab on July 28 showed that Trump's tariff policy (as of July 27, statements and executive orders signed by Trump) would lead to a short-term increase in US prices by 1.8%. Some leading indicators of US inflation have already shown signs of price increases. Historical data shows that the US ISM Manufacturing PMI price sub-index usually leads US CPI on a year-on-year basis by about 6 months. The US PMI price sub-index started to rise at the end of 2023, accelerating in 2025, reaching a high level of above 69 for nearly four months (March-June 2025), indicating that US inflation pressure may gradually become more apparent in the second half of the year. Specifically, leading signals from food and used car prices also suggest that US inflation will face upward pressure. Risk factors: - US economic changes exceed expectations; - Trump administration policies exceed expectations; - US monetary policy exceeds expectations; - Geopolitical risks exceed expectations, etc.