Weekly global economic update

Week of July 21, 2025

• US inflation data hint at tariff impact
• US monetary policy is under a microscope
• Chinese economic data point to modest strength
• The latest on trade rules

US inflation data hint at tariff impact

• Despite the US government’s implementation of significant tariffs in recent months, inflation did not quickly accelerate as some observers had expected. Yet prior to the implementation of tariffs, imports soared in anticipation of tariffs, leading to a surge in inventories. This enabled retailers to maintain prices as they dipped into existing inventories. Yet that is now starting to change. the US government recently released data on inflation in June. It showed that inflation accelerated for the second consecutive month, with prices of some durable goods rising sharply. This was most likely due to tariffs.

The Yale Budget Lab estimates that, currently, the average tariff rate for the United States is 20.6%, the highest since 1910, and much higher than the 3% at the start of this year. The tariffs include a 55% duty on many imports from China, 25% on most automobiles, 50% on steel and aluminum, and a 10% baseline tariff on most countries. Tariffs affect consumer prices in two ways: First, many consumer products are directly imported. Importers must pay a duty and, in many cases, will pass that additional cost onto consumers in the form of higher prices. Second, imported components and commodities are used by US-based companies to produce goods and services. They pay a duty that they can also pass onto their customers in the form of higher prices.

The Yale Budget Lab estimates that, if all current tariffs are fully passed onto consumers, prices will rise 2.1% from their baseline. Given that inflation has been running above 2%, this suggests that overall inflation could rise to above 4% in the coming year. Moreover, the US administration has proposed additional tariffs to start on August 1. If these tariffs are implemented, the average tariff rate will be significantly higher while the inflationary impact will likely be greater.

In any event, let’s consider the latest inflation news. The recent inflation report from the government indicated that the consumer price index (CPI) was up 2.7% in June from a year earlier, up from 2.4% in May and 2.3% in April. Prices were up 0.3% from the previous month, the biggest monthly gain since January. When volatile food and energy prices are excluded, core prices were up 2.9% from a year earlier, the biggest annual gain since February. Inflation remains relatively low, but the trajectory has reversed as tariffs start to affect consumer prices.

The details are interesting. Many household products and appliances are imported from China. With very high tariffs applied to imports from China, it is not surprising that prices of some of these products surged in June. For example, prices of appliances were up 2.3% from May to June, while prices of window and floor coverings were up 4.2% and prices of nonelectric cookware were up 4%. Prices of audio equipment were up 2.9%. These are very large monthly increases that likely result from tariffs. Prices of durable goods were up 0.5% from the previous month and up 0.6% from a year earlier. The latter number was the highest since November 2022. Recall that, for a long time, prices of durables were steadily declining.

It is likely that, in the coming months, consumer prices will accelerate further as the cost of tariffs is passed onto consumers. The latest data, as well as the expectation of acceleration, likely mean that the Federal Reserve will keep interest rates unchanged for a while. Currently, futures markets are pricing in a 73% probability of two interest rate cuts by the Fed by the end of the year, with one cut in October and one in December. Investors likely believe that the Fed will see the inflationary impact of tariffs to be transitory. Rather, investors might believe that the Fed will be concerned about the negative impact of tariffs on economic activity. After all, as prices rise and wages fail to rise commensurately, household purchasing power will decline, thereby hurting real (inflation-adjusted) consumer spending.

Meanwhile, there have lately been news reports about potential administration efforts to push Fed Chair Powell out of power, likely to be replaced by someone committed to interest-rate reductions. President Trump has suggested that the Federal Funds rate be cut by 300 basis points. That is not likely to happen under any Fed Chair, but if investors perceive the Fed to be influenced by the administration it would likely lead to higher bond yields. In response to the inflation report, the yield on the US Treasury’s 10-year bond increased 60 basis points, the value of the dollar increased, and equity prices were relatively stable.

US monetary policy is under a microscope

• The US administration wants low interest rates and has reportedly discussed replacing Fed Chair Powell. When the news of this discussion broke, equity prices fell, bond yields increased, and the value of the dollar fell sharply. Since then, equities have rebounded, bond yields have declined, and the dollar has regained some ground. While equities and bond yields returned to their previous levels, the dollar did not.

Replacing Powell would not guarantee lower short-term interest rates. The Federal Open Market Committee (FOMC), which controls short-term rates, consists of 12 voting members, and my sense is that the committee would be averse to such a policy shift. If Powell is dismissed as chairman but chooses not to give up his seat on the board, then President Trump would have to appoint a new chairman from among the existing board members.

In addition, if there were to be a perception that the Federal Reserve’s independence had been compromised, it would likely lead to higher longer-term rates because of higher inflation expectations. This would have a negative impact on some interest-sensitive sectors of the economy.

Meanwhile, leaving aside the issue of who sits in the chairman’s seat at the Fed, there is a way that the administration could drive down short-term rates. And that is to cut tariffs. That is not simply my opinion. That is what we’ve heard from Fed officials. In fact, the President of the Federal Reserve Bank of New York, John Williams, who is the second most powerful Fed official after Powell, said that he is reluctant to support lowering interest rates because of tariffs. Specifically, he said, “For items that are more exposed to higher tariffs ... price increases so far this year have been well above what one would expect based on past trends.” Therefore, he concluded, “maintaining this modestly restrictive stance of monetary policy is entirely appropriate.” As inflation accelerates due to tariffs, which is likely to happen, the big question for the Fed will be whether the increase in inflation is transitory. The Fed’s view on that issue will partly determine the direction of interest rates.

It is notable that, in the past three weeks, the five-year breakeven rate, which is a measure of bond investor expectations of average inflation over the next five years, has risen about 200 basis points. It is now at the highest level since just prior to the president’s announcement of large tariffs in early April. This rise corresponds with recent discussion about the possibility of removing Powell. Notably, long-term inflation expectations fell after the April announcements as investors expected a weaker economy to generate less inflationary pressure.

Chinese economic data point to modest strength

• China’s economy has been supported by government stimulus measures while exports to the United States have been hurt by tariffs. On balance, however, the Chinese economy appears to be doing well, according to the latest data released by the Chinese government. Let’s look at the data.

The government reported that, in the second quarter of 2025, real GDP was up 5.2% from a year earlier and up 1.1% from the previous quarter. This was attributed to strong export growth (even though exports to the United States fell sharply), healthy retail sales, and strong growth of manufacturing output. However, fixed asset investment faltered, largely due to a very sharp decline in property investment. The 5.2% figure was a slight deceleration from the first quarter but better than many analysts expected.

Going forward, the government is likely to continue efforts to boost domestic demand through a combination of monetary and fiscal stimulus. Fiscal measures have included subsidized trade-in programs for appliances. As for monetary policy, the deputy governor of the central bank (the People’s Bank of China, or PBOC) said that “monetary policy operates with a lag, and the full impact of current measures is still unfolding. The PBOC will continue to implement a moderately loose monetary policy.” On the other hand, some analysts believe that monetary policy has not been effective in that lower interest rates are not boosting credit activity as businesses and households choose to hoard cash. Of greater importance are structural reform measures meant to encourage households to spend more and save less.

Meanwhile, the government also reported that retail sales were up 4.8% in June versus a year earlier. Although this was the slowest retail sales growth since February, it was a healthy pace given very low inflation. It was helped by government subsidies for appliance trade-ins, with sales of appliances up 32.4% in June versus a year earlier.

In addition, China’s industrial production was up 6.8% in June versus a year earlier. This was the second fastest growth since February 2024. The manufacturing component grew 7.4%. This included growth of 11.4% for automobiles, 11% for computers and communication, and 10% for railway and shipbuilding. On the other hand, fixed asset investment in the first half of 2025 was up only 2.8%. Although investment in manufacturing was up 7.5%, investment in property fell 11.2%. The latter reflects the continuing troubles in the residential property market.

The latest on trade rules

• President Trump said that he intends to impose a 30% tariff on all imports from the European Union (EU) and a 30% tariff on imports from Mexico. He said these rates will take effect on August 1. With respect to the EU, the proposal comes after weeks of negotiations between the United States and EU. In response to the latest proposal, the EU chose to postpone retaliatory tariffs in the hope that an agreement can be reached before August. Still, it was reported that the EU is considering tariffs on imports of US services. European equity prices fell sharply following the tariff news.

European Commission President Ursula von der Leyen said that tariffs “would disrupt essential transatlantic supply chains, to the detriment of businesses, consumers, and patients on both sides of the Atlantic.” She left open the possibility of retaliation. In his letter to the EU, President Trump demanded that the EU end all tariffs on imports from the United States, “in an attempt to reduce the large trade deficit.”

Meanwhile, the EU Trade Commissioner suggested that trans-Atlantic trade could be seriously disrupted by such a high tariff. Maros Sefcovic said that “it will be almost impossible to continue trading as we are used to in a transatlantic relationship. Transatlantic supply chains would be heavily affected on both sides of the Atlantic.” Italian Prime Minister Giorgia Meloni, who has a good relationship with Trump, said that “it would make no sense to trigger a trade war between the two sides of the Atlantic.”

Regarding Mexico, which is the largest trading partner of the United States, Mexican President Claudia Sheinbaum said, “I've always said that in these cases, what you have to do is keep a cool head to face any problem.” She suggested that a deal can be reached, saying, “We're also clear on what we can work with the United States government on, and we're clear on what we can't.” Although the tariff on Mexico excludes goods covered by the free trade agreement between the United States, Mexico, and Canada, Mexico will still be subject to tariffs on steel and aluminum.

• Meanwhile, the United States reached a trade deal with Indonesia. In April, when President Trump announced reciprocal tariffs on many countries, Indonesia was set to face a US tariff of 32% on its US exports. The reciprocal tariffs were postponed, first until early July and then until August 1. Recently, it was announced that the United States will impose a 19% tariff on imports from Indonesia. Meanwhile there will be a zero tariff on Indonesian imports of US goods. In addition, Indonesia agreed to purchase US$15 billion in US energy products, US$4.5 billion in agricultural goods, and 50 jet airplanes. The deal is similar to the deal reached between the United States and Vietnam. It is the fourth deal the United States has reached (the other two are the United Kingdom and China). All deals involved the United States retaining historically high tariffs. Although the United States will now face zero Indonesian tariffs, most US goods already faced tariffs of less than 5%.

President Trump lauded the deal as a win for the United States. Indonesian President Prabowo said that “we have calculated, discussed everything. This is our offer. We cannot give more. I have to protect our workers.” For Indonesia, the 19% tariff will be an obstacle to export growth. However, it is far better than the proposed 32% tariff. The 19% tariff will be paid by US consumers and businesses. 

Given that the deals reached so far involve high US tariffs but low tariffs from other countries, it appears that the principal focus of US trade policy is to reduce imports and boost exports. This represents a mercantilist view of trade in which employment in exporting industries is seen as the main benefit of trade. Yet the traditional economic view is that trade is meant to boost consumer spending power, lowering prices by creating more competition for domestic producers. Plus, competition is meant to create greater efficiency and more choices for consumers.

Meanwhile, the Indonesian central bank cut its benchmark interest rate by 25 basis points. It cited low inflation, a stable currency, and a need to boost domestic demand. Indonesian equity prices rose in response. Although the 19% tariff will hurt Indonesian exporters, Indonesia has substantial trade with many other countries, with China being its largest trading partner and largest source of inbound investment. Indonesia is a major exporter of mineral and agricultural commodities.

The commitment by Indonesia to purchase more US products is a form of managed trade. That is, rather than allow free market forces to determine what is bought and sold, governments agree on specific quantities. The problem with managed trade is that it can result in a suboptimal allocation of resources, inefficiency, potential corruption, and slower growth of productivity and economic output.

Week of July 14, 2025

• The surprising behavior of US equity prices
• The trade war is renewed
• Where is the inflationary impact of tariffs?

The surprising behavior of US equity prices

• There has been much discussion about the resilience of US equity prices in the face of uncertainty and a trade war. One explanation is that the decline in the value of the dollar has boosted the dollar value of foreign earnings for US-based companies. This, in turn, has a positive impact on company valuations. Moreover, the decline in the dollar has surprised investors. After all, economic theory tells us that increases in tariffs should lead to an increase in the value of the currency. Instead, the opposite happened. This is likely due to capital flight from the dollar overwhelming the impact of tariffs, thereby leading to currency depreciation. Moreover, a cheaper dollar will boost the competitiveness of US exports, also potentially boosting earnings.

Some analysts note that, after having fallen sharply, US equities have recovered strongly, thereby negating the performance gap with European equities. This is true when each country’s equity indices are evaluated in their own currencies. However, if European equities are evaluated in US dollars, they have performed better than US equities, given the rising values of the euro and the pound. This suggests that global investors are still more pessimistic about US prospects than European prospects—likely the result of anxiety about the trade wars.

Still, why have US investors been relatively relaxed about the potential impact of trade conflict? Perhaps it is due to relative calm since late April. In fact, the spread between the yields on junk and Treasury bonds, having soared in April, is now back to a level last seen in February—indicating a perception of only modest risk. However, with the latest trade-related announcements and threats, it looks like the trade war is not receding while uncertainty continues to prevail.

Perhaps investors are optimistic about the impact of the “One Big Beautiful Bill” on effective corporate tax rates. On the other hand, if the act leads to higher borrowing costs than otherwise, corporations will be hurt. Finally, perhaps investors had expected the trade war to have caused negative economic consequences by now. And yet, the US economy remains relatively healthy while inflation remains low. Indeed, expectations for inflation in the coming five years remain relatively low. Still the negative consequences of the trade war might take time to show up.

Notably, President Trump threatened a 200% tariff on pharmaceutical imports and a 50% tariff on copper imports—and yet the US equity market did not react. Evidently, many investors believe that Trump’s threats are simply the opening move in a negotiation. Thus, some investors ignore trade news and focus on other things. Still, investors seem to forget that the president has left in place historically high tariff rates which, over time, will likely have a negative impact on equities.

Interestingly, not all investors ignored the president’s comments. Copper prices have soared—up roughly 10% in the last two days. This is not trivial given that copper is used in a wide range of important products and industries. Moreover, if the 50% tariff is implemented, it could lead to dramatic increases in the cost of producing many key products. Yet a recent poll of equity traders found that the vast majority expect the average US tariff rate to be below 18% after the August 1 deadline for establishing tariff rates. This is relatively optimistic, especially given that the average tariff rate now is roughly 18%. Even if the survey respondents are right, that still leaves tariffs at the highest level in 90 years. After all, the survey found that less than 5% of traders expect the average tariff rate to fall below 10%.

Finally, traders appear to be ignoring the potential impact of tariff variability and uncertainty. Since early this year, the trade environment has involved threats of tariffs, imposition of tariffs, reversals of tariffs, and postponement of tariff decisions. This makes it difficult to make strategic decisions and to invest accordingly. It is likely that some companies are postponing decisions until there is greater clarity. If multiple companies choose to delay, it can have a negative impact on overall business investment and, consequently, economic activity.

Ironically, with equity prices strong and bond yields and the dollar relatively stable, there is only modest pressure on the administration to reverse course on tariffs. Recall that, in early April, following the announcement of very high tariffs, the US equity market plummeted, leading the administration to postpone tariffs while negotiations take place. Now, with final tariff rates said to be coming before August 1, investors should be bracing for a shift in expectations.

The trade war is renewed

• The United States appears to be moving toward sustained, very high tariffs. The three trade deals reached so far (with the United Kingdom, Vietnam, and China) have left US tariffs historically high, potentially offering a template for future deals with many other countries. Although the United States has postponed final determination of tariffs until August 1, the framework for a new US relationship with the world is now emerging.

Japan and South Korea

President Trump sent letters to the leaders of South Korea and Japan indicating that the United States intends to impose a 25% tariff on imports from those countries unless they make unspecified changes to their trade policies. Under current law, the United States and South Korea have a free trade agreement that took years to negotiate and was approved by the US Congress. New tariffs will end that agreement. This raises the question as to what concessions South Korea could make to appease the US administration. In my view, there are none. Rather, the letter sent by the president focuses on the bilateral US trade deficit with South Korea and urges Korean companies to invest more in the United States. The idea is that, if Korean companies make more things in the United States, they will export less to the United States.

A few comments on this: first, increased inbound investment in the United States necessarily leads to a bigger trade deficit. That is because capital flows and trade flows must offset one another. Second, the bilateral trade imbalance between two countries is not consequential. Rather, the overall trade imbalance of a country is important but is not the result of trade rules. Third, If Korea cannot make any meaningful concessions that would satisfy the United States, then it will evidently be left facing a high tariff barrier for its exports. This will surely hurt Korea’s economy, but it will hurt US consumers even more. Although it might lead US consumers to divert trade to other countries, this would only make sense if tariffs are lower on other countries’ exports. That might not be the case if the US imposes high tariffs on most countries.

In Japan, it is reported that leaders are shaken by the US intention to impose a 25% tariff on imports. The country’s leaders had hoped that the expansive economic and political relationship between the two countries would protect Japan from severe tariffs. Indeed, Japanese Prime Minister Ishiba recently said that “Japan is the world's largest investor in the United States and creates the largest number of jobs. We are in a different situation from other countries.” Evidently, that is not the case.

Trump also announced potential tariff rates on multiple countries, to take effect on August 1, provided no deal is reached with these countries. He left open the possibility of deals, rendering the proposed rates highly uncertain. What we do know is that the rates are very high—in most cases similar to the so-called “reciprocal” tariffs announced on April 2 but postponed. If these new rates are implemented, it would mean that the average US tariff rate would reach a level not seen in more than a century, likely disrupting global trade flows as well as cross-border investment flows. Moreover, these proposals say nothing about potential new tariffs on specific products that are currently being considered. Recall that a US court ruled that the country-level tariffs are mostly illegal. If this is upheld by higher courts, the administration is likely to turn to product-related tariffs as its principal tool.

If the average US tariff rate remains at the current level, or goes higher, it will change the dynamics of the global economy. It will almost surely boost US inflation, at least temporarily. This, in turn, will influence the trajectory of the Federal Reserve’s monetary policy. In addition, tariffs will lead to reduced imports and lower consumer purchasing power, likely causing US economic growth to decelerate and possibly leading to a US recession. For other countries, high US tariffs will reinforce efforts to boost trade with one another and to boost domestic demand. For some countries, retaliation will take place, as was suggested last week by Germany’s chancellor with respect to the European Union.

Southeast Asia

Regarding Southeast Asia, it appears that the administration is leaning toward very high tariff rates. This is important because, in recent years, much investment that might otherwise have gone into China went to Southeast Asia as companies sought to reduce the risk of doing business in China. Yet now it is reported that the US administration is considering tariffs ranging from 25% to 40% on imports from such countries as Cambodia, Laos, Indonesia, Thailand, Philippines, and Malaysia. If this happens, it will be significant for US consumers who purchase many goods assembled in these countries. It could have a big negative impact on these countries, likely disrupting existing supply chains.

On the other hand, this is not yet written in stone. Negotiations are taking place. The US administration already reached a deal with Vietnam in which the United States imposes a 20% tariff on imports from Vietnam, and Vietnam imposes a zero tariff on imports from the United States. It is not clear if this deal will be a template for Vietnam’s anxious neighbors. Even a 20% tariff is very significant.

Leaders in Southeast Asia have begun to react to the likelihood of high tariffs. For example, Malaysian Prime Minister Anwar criticized the new environment, saying that “across the world, tools once used to generate growth are now wielded to pressure, isolate, and contain. Tariffs, export restrictions, and investment barriers have now become the sharpened instruments of geopolitical rivalry.” Malaysia’s central bank cut its benchmark interest rate by 25 basis points—the first cut in 25 months—in an attempt to boost domestic demand and offset negative consequences for exports.

Canada

US-Canadian trade relations have returned to the top of the headline after several months of calm. Yesterday, US President Trump said that a 35% tariff will be applied to imports from Canada, excluding goods covered by the free trade agreement between the two countries—although that exemption might be changed according to the US administration.

Reaction in financial markets was mixed. US equity prices fell sharply before slightly rebounding, as did Canadian equity prices. The value of the Canadian dollar fell sharply but bounced back significantly due to expectations that the 35% tariff will not necessarily happen. Many traders believe that each threat made by the United States is simply an opening move in a negotiation. Yet the recent resolution of trade disputes with other countries suggests that the United States intends to keep relatively high tariffs.

The 35% tariff on Canadian imports is more than the 25% rate threatened earlier in the year. Since then, Canada has gotten a new prime minister (Mark Carney) who has worked hard to improve relations with the United States—going so far as to cancel a digital services tax about which the United States complained. Yet the latest announcement suggested that the tariff is partly about fentanyl. President Trump said that “if Canada works with me to stop the flow of fentanyl, we will, perhaps, consider an adjustment to this letter. These tariffs will be modified, upward or downward, depending on our relationship with your country. You will never be disappointed with the United States of America.” Trump also warned that, if Canada retaliates, the US tariff will go up further.

Although the volume of fentanyl crossing the border from Canada to the United States has reportedly been small, the Canadian government has vowed to spend US$1 billion to curtail the flow. Prime Minister Carney said that “vital” progress has been made on this front. He said that he will work with the US administration to resolve any differences.

Moreover, whatever happens regarding US-Canada relations will ultimately be replaced by the required review of the existing free trade agreement between the United States, Mexico, and Canada. This review must take place in 2026. It is likely that changes will be made to the agreement.

Brazil

When the US administration proposed severe, so-called reciprocal tariffs in early April, the size of each country’s tariff depended on the size of its trade surplus with the United States. For countries that had trade deficits with the United States, there was a baseline tariff of 10%. Brazil is one of the countries that has a deficit with the United States. Yet yesterday, President Trump threatened to impose a 50% tariff on imports from Brazil because the government is prosecuting former President Bolsonaro, who is accused of attempting a coup. This is a tariff not based on any economic factor but, instead, on a political one. Thus, the current US administration likely sees tariffs as the ultimate tool to pressure foreign governments, regardless of economic circumstances.

It is unlikely that Brazil will make any changes to satisfy Trump. In response to the US threat, the value of the Brazilian currency fell sharply while Brazilian equities declined as well. Moreover, if a 50% tariff is implemented, it will have a significant impact in the United States. Brazil is the largest source of coffee for the country. Coffee futures prices climbed sharply today on the news of the US threat. 

In addition, Brazil is the third-largest purchaser of US steelmaking coal. Brazilian companies finish the coal and sell it back to the United States. Thus, for US steelmaking companies, this will represent an increase in their costs. Brazil also exports many other products, including medium-sized airplanes, that are popular with US airlines for short-haul routes. Thus, the potential tariff could be very impactful.

Copper

The US administration said that a 50% tariff on copper imports will take effect on August 1. Thus, it appears that the effective average US tariff, which is currently around 18%, is set to increase significantly by August. Recall that, at the start of the year, it was under 3%.

Regarding copper, the country imports about 60% of the copper it consumes, with most of it coming from Chile, which has a free trade agreement with the United States. About 40% comes from domestic mines or the recycling of scrap copper. In response to the threatened tariff, the price of copper has soared as companies have sought to purchase quickly in anticipation of tariffs. Indeed, copper inventories in the United States have also soared, roughly doubling since the start of the year. The latter is a concern in China, the world’s largest consumer of copper. Meanwhile, diversified mining companies, which might see their US mines benefit from the tariffs, saw their share prices fall, given the likely disruption of the global market.

Where is the inflationary impact of tariffs?

• When US tariffs were boosted significantly, it was widely expected that this would lead to much higher prices of imported goods and thereby boost US inflation. So far, this has not happened. As such, the US administration is claiming victory. It notes, for example, that the export prices of Japanese vehicles have fallen sharply as Japanese auto producers have cut prices in response to tariffs with the goal of retaining market share. It means that they will take a hit to their margins. President Trump tweeted that “import prices are actually dropping, just like I always said they would. The fake news and the so-called ‘experts’ were wrong again. Tariffs are making our country boom.”

Could it be that tariffs will not lead to higher prices? Probably not. Rather, it appears to be taking some time before the impact of tariffs feeds its way through supply chains to ultimately affect consumer prices. Moreover, it also appears that, initially, some producers are trying to retain market share by reducing their margins.

More importantly, when the prospect of tariffs increased following the election in November 2024, there was a temporary surge in imports into the United States in anticipation of tariffs. This led to a buildup of inventories into which companies are now dipping. Once excess inventories are depleted, the true pricing impact of tariffs is likely to take hold.