Trump Win Could Fuel Inflation and Higher Interest Rates

The re-election of Donald Trump to the US presidency could lead to a surge in inflation both domestically and globally, as his proposed economic policies, including tax cuts, immigration restrictions, and tariffs, are likely to stimulate demand and increase costs, reports CNN.

Trump's victory, which was projected by CNN on Wednesday, has already triggered a surge in US stock markets and a spike in Treasury yields, reflecting investor expectations of a more inflationary environment.

Trump's proposed economic agenda, if fully implemented, could "likely lead to a substantial decrease" in US economic output and "a large increase in inflation," said Antonio Fatás, an economics professor at INSEAD, to CNN.

"Investors are bracing for tariffs... which will push up the price of imported goods for American shoppers," said Susannah Streeter, head of money and markets at Hargreaves Lansdown, to CNN. Trump's "vow to kick out immigrants with waves of deportations could also have economic ramifications, potentially pushing up wage bills for companies."

Trump's proposed tariffs, which would impose a 10% to 20% tax on all imported goods, could significantly impact both US consumers and businesses that rely on imported materials and finished products.

"We now expect just one Fed cut in 2025, with (monetary) policy on hold until the realized inflation shock from tariffs has passed," Nomura analysts wrote in a note.

The pain of these tariffs would extend beyond US borders. If trading partners retaliate with their own tariffs, "a material increase in global inflation would follow, while the ensuing hit to world trade would negatively impact (economic) growth," said Investec chief economist Philip Shaw and economist Ellie Henderson.

A stronger dollar, fueled by Trump's policies, could also contribute to global inflation. "As the dollar rises, countries that import commodities priced in USD may also see price increases, which will either need to be absorbed by companies or passed on to customers," said Streeter.

Mexico and Canada, heavily reliant on exports to the US, could be most vulnerable to Trump's tariff policies.

"We also believe that Trump could decide to implement even higher tariffs on economies that run large trade surpluses with the US," said analysts at BMI, a market research firm owned by Fitch Solutions. Mexico, along with countries like China, Japan, Germany, and South Korea, could face pressure to increase demand for US goods.

A 60% tariff on Chinese goods could significantly impact China's economic growth, according to BMI, while German exporters, who rely on the US as their largest market outside the European Union, could experience "severe losses" if Trump imposes tariffs on all trading partners.

The potential for higher inflation and slower economic growth has already prompted traders to adjust their expectations, with the Federal Reserve now expected to keep interest rates on hold for longer, while the dollar has strengthened against major currencies.