- Donald Trump said he would implement tariffs on imported goods.
- Companies are already saying the proposals will raise prices for consumers.
- The Federal Reserve would likely respond to inflation by raising interest rates to curb demand.
One of the first policies expected from President-elect Donald Trump after he's sworn into office is higher taxes on imported goods.
Many economists say these tariffs, as well as some of his other proposals, could kick-start another bout of inflation and interest-rate hikes.
Trump has said that his proposals would not influence US prices. "I am going to put tariffs on other countries coming into our country, and that has nothing to do with taxes to us. That is a tax on another country," he said in an August speech.
Some experts have said otherwise. Economists and investors project that these higher taxes on imports would be passed on to American consumers in the form of higher prices. Some companies have already warned of higher prices to come. In such a scenario, an economic chain reaction could lead to households paying higher interest rates on borrowing of all kinds as the Fed moves to tame that rekindled inflation.
Ramping up tariffs from Trump's first term is expected to eat into Americans' wallets
On the campaign trail, one of Trump's cornerstone proposals was a 60% tariff on goods imported from China and a 10% to 20% tariff on imports from other countries.
The US Census Bureau reported that broad tariffs would likely affect the prices of automobiles, drugs for humans and animals, food and beverages, furniture, and household appliances.
Trump could announce these changes as soon as he takes office because they would not require congressional approval. However, because implementation takes time, consumers wouldn't see higher prices immediately.
Still, the Washington Post reported in late October that some companies have already begun adjusting their business plans in anticipation of Trump's tariff proposals. Auto parts retailer AutoZone is also preparing for price increases.
"If we get tariffs, we will pass those tariff costs back to the consumer," Philip Daniele, CEO of AutoZone, said on a pre-election earnings call.
Stanley Black & Decker told investors it would likely have to adjust prices to offset new tariffs and Columbia Sportswear is already planning to do so, the Post reported.
"We're set to raise prices," Columbia's CEO Timothy Boyle told the Post, adding, "It's going to be very, very difficult to keep products affordable for Americans."
Markets also appeared to brace for inflation, as yields surged on the 2-year, 10-year, and 30-year Treasury bonds on news of Trump's win. The view is if prices start to rise, the Fed could eventually be forced to raise interest rates, which would mean higher borrowing costs for American consumers and companies. This includes mortgage rates, which are on track to surpass 7%.
An analysis from the nonpartisan Peterson Institute examined Trump's proposed 60% tariff on goods imported from China and estimated that it would boost inflation by 0.4 percentage points in 2025. The estimate does not include Trump's proposal for a 10% to 20% tariff on other imports.
An analysis by the nonpartisan Tax Policy Center found that Trump's policies would decrease posttax incomes by an average of $1,800 in 2025. A separate analysis by the left-leaning Center for American Progress found that his tariff plans could cost the typical American household an extra $1,500 a year.
The Tax Foundation estimated that in Trump's first term, his tariffs amounted to additional costs for Americans, which it said functioned as a nearly $80 billion tax increase for Americans buying Chinese imports.
But there's a catch. The tariffs Trump enacted in his first term did not result in a significant inflation increase. The difference this time around — and the reason inflation forecasts are more stark — is how much deeper and more wide-reaching Trump's tariff proposals are for not just China but also the rest of the world.
Trump's win is also expected to influence the Federal Reserve's upcoming decisions on interest rates. While it's too early for the Fed to make any adjustments, members of the Federal Open Market Committee may soon begin discussing how Trump's economic policies could affect consumers — including whether the central bank would need to hike interest rates in response to inflationary pressure.
The Fed is expected to cut interest rates by 25 basis points on Thursday, and Fed chair Jerome Powell is likely to offer some insight into the Fed's direction following Trump's victory.
However, the future of the Federal Reserve is uncertain under Trump. He has previously suggested that he would like to have a say in interest-rate decisions, something presidents have not had. This raises the question of whether the central bank will remain politically independent.
Americans will likely learn more about what to expect from Trump as the year comes to a close. While he has maintained that his policies will help the economy and leave Americans better off, the Nobel Memorial Prize-winning economist Joseph Stiglitz previously told Business Insider that the consensus among experts was that "the Trump administration would be more inflationary."
"The broad assessment of the consequences of that is that the Fed would be forced to raise interest rates," he said, "and all that combined would still serve to increase inflation even as unemployment increased and GDP slowed."
