Tying tariffs to inflation perceptions

Daily update

There are more reports of the US administration scrambling to cut tariffs using framework trade deals with Latin American economies. Heightened political concerns about US consumers’ inflation perceptions seem to be leading a drive to reduce the tariffs US importers pay on food products. Bilateral negotiations with Latin American countries will be limited in their scope because of Mercosur trade pact rules.
The US policy shift does have some risks. US consumers’ belief that they pay for tariffs is likely to be reinforced by this stance. Because tariffs are paid early in the supply chain, a 10% tariff should generally produce a 4% consumer price increase. If the popular perception of tariffs translating into consumer prices is strengthened by this policy, consumers may expect a 10% price increase, giving retailers an opportunity for profit-led inflation.
October data from China was mediocre in tone. Industrial production and investment data were weaker than expected. Some of this may be due to trade disruption, but the government’s “anti-involution” (anti-competition) policy works against building industrial capacity. Retail sales numbers were more in line with expectations, though with distortions from the timing of sales festivals.
ECB Chief Economist Lane speaks, but stable policy expectations lessen market interest. Eurozone September trade data is not a focus.