World Inflation at Risk?

As President Donald Trump threatens tariffs on the US’s trading partners, the worry of another inflation wave troubles global economists. Tariff wars are inflationary, that’s not up for debate. 

While China shows little sign of vulnerability to a price shock for now, the same can’t be said for the rest of the world if some spiral of tariffs unfolds. Multiple economies face latent inflation pressures, either domestic or external. 

In the US, a resilient labour market is keeping the Federal Reserve alert. Trump’s policies threaten to drive bond yields higher. Elsewhere, dollar strength is haunting emerging markets such as Indonesia. Eurozone consumer-price growth has been faster than expected. The Bank of England recently said they may be forced to raise its forecast for inflation. 

Trump’s arrival has added to pre-existing worries. Despite an International Monetary Fund official declaring (in October) that the battle against inflation was “almost won,” attendees at the World Economic Forum in Davos in January 2025 harboured open doubts. 

A Bank of America survey of global fund managers in January showed the re-emergence of global consumer-price growth as a key theme for 2025. The World Bank predicted slowing inflation but still warned that it “could prove to be more persistent than expected.” That chimes with markets. 

For the US in particular, analysts are openly starting to reassess inflation prospects. Morgan Stanley recently scrapped its forecast for a Fed interest-rate reduction in March. That followed Chair Jerome Powell’s remarks recently that officials aren’t in a rush to lower borrowing costs as policymakers pause easing to see further progress on inflation. The potential for increased tariffs complicates that outlook.

Across the Atlantic, the extent of any trade response is to be watched closely if Trump unleashes tariffs. For now, policymakers have downplayed them as a price driver in either direction. European Central Bank President Christine Lagarde has argued she isn’t “overly concerned” about imported inflation and BOE Governor Andrew Bailey has said tariff effects aren’t straightforward to predict. Euro-area inflation unexpectedly accelerated in January, while selling-price expectations rose to the highest level in almost a year for services, and the strongest in nearly two years in manufacturing. Consumers and professional forecasters are less sanguine than policymakers, raising their 2025 inflation outlook. And a Bloomberg poll showed a majority of economists is now more concerned about price pressures exceeding 2% in the medium term. 

What about Malaysia? Tariffs will raise headline inflation but we also have other issues like petrol subsidy rationalisation (RON95), electricity tariff hike and salary increases (for civil servants) to help inflation to 3.5% in 2025 (1.8% in 2024). 

What could we do? Raise interest rates? Defer electricity tariff hike? Defer subsidy rationalisation? Produce more food and essential items locally? We may need to set-up a reserve for the most vulnerable?  All of the above and many more! Remember, this time there is no savings left in EPF for contributors to dip into! 

Reference:

World inflation at risk of rekindling with Trump’s trade war, Jana Randow, Katia Dmitrieva and Enda Curran, Bloomberg, 6 February 2025