Like all prices, supply and demand are the key variable to watch.
With inflation in particular everyone understands inflation to be the increase in prices. No argument. However, I would like to provide an alternative definition, the devaluation of money. It’s important to remember this distinction because it plates a crucial role in pricing that we have seen in this violent 2 day sell off.
Tariffs came in higher than expected leading to the sell off. This has second and 3rd order consequences. More revenue expectations for the US which means lower deficit which means lower debt which means less money printed which means less debasement of the currency which means a stronger currency which means less inflation!
Think I’m nuts, look at where the market is moving:
Treasuries are outperforming TIPs during the last month (tariff talk escalations)
Commodities are falling which are the raw inputs into goods (lower input costs in competitive markets can lead to lower prices)
There is a multiplicative effect here too. The lower yields lead to less future interest payments and therefore less money debasement and therefore stronger currencies and less inflation…
Remember only bad investors and sith lords believe in absolutes.
With all these countries now competing for better deals, some will see the plain fact that if they simply cut a deal with the US they will be one of the few countries with no tariffs leading to outsize growth of imports in the US. If the US cuts a meaningful amount of deals, we will still have a large base to import items not subject to tariffs. These will bring competition with tariffed nations making it difficult to pass on the full tariff to customers and instead they will have to eat it on a margin basis or risk losing possibly a top customer.
The belief that inflation will rise because countries will retaliate is clearly a real risk. It’s just that when markets have alternatives, prices generally can’t increase as much as we generally think.
TLDR: the increase of prices on goods from tariffs is going to be partially offset by a stronger currency in the US. A handful of countries that are able to cut deals with the US will be able to supply without tariffs or minimal tariffs leading to alternatives without price hikes.
I welcome your critiques