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Krishen Rangasamy, analyst at National Bank of Canada, points out that if the US imposes a 25% tariff next year to Chinese goods, the impact on inflation is likely to be limited.

Key Quotes:

“Yesterday’s decision by the White House to escalate the U.S.-China trade war means that roughly half of U.S. imports from China (US$250 bn) will be subject to a 25% tariff next year. While that casts doubts about global growth in 2019 (via weaker world trade volumes), we’re less concerned about impacts on the U.S. economy.”

“The Fed understands that any inflation impact of tariffs is temporary and will fade after a year ─ unless, of course, tariffs are raised every year after that. Also, given the relatively low content of imports from China in U.S. personal consumption expenditures (roughly 2% of PCE), the impact on prices is likely to be limited.”

“A 25% tariff on US$250 bn worth of imports from China would raise the annual U.S. inflation rate by less than 0.3%. The inflation impact would be even smaller if importers decided to preserve market share by not fully passing the higher costs to consumers or if say Beijing allows its yuan to depreciate versus the USD so as to reduce the “effective” tariff rate.”

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