Goldman: Trade War to Boost U.S. Inflation Rate, Hurt Growth

The TIPs have been heading higher all year, in spite of tepid CPI data.

President Donald Trump’s latest tariff increase on Chinese goods will drive up the Federal Reserve’s preferred measure of underlying inflation, and a further escalation of the trade war will have an even greater impact on prices as well as economic growth, according to Goldman Sachs Group Inc.

Goldman revised up its estimate of the tariff impact on core personal consumption expenditures inflation to 0.2 percentage point, according to a note Saturday. The firm estimates if the U.S. imposes tariffs on the roughly $300 billion remaining in Chinese goods, the effect would increase to 0.5 point. Should core inflation rise “noticeably” above 2% next year, that would “slightly increase the likelihood” of an interest-rate increase by the central bank.

The investment bank cited new evidence of the effects of the 2018 tariffs from two studies published in March by the National Bureau of Economic Research. It also broke out consumer prices on categories affected by tariffs, showing costs had increased sharply in the last year for such sectors while declining in non-tariff categories of items.

“The costs of the tariffs have fallen entirely on U.S. businesses and households,” the Goldman economists said, contrasting with Trump’s contention that China pays the levies. “Further escalation of the trade war could result in a hit to GDP as large as 0.4%, and if trade tensions sparked a major sell-off in the equity market the growth impact could worsen considerably.”

China’s Ministry of Finance said Monday the country will raise tariffs on American goods starting June 1 after the U.S. increased tariffs on 5,700 different product categories from China to 25 percent from 10 percent.

While consumer goods account for about 25% of the items targeted in Friday’s escalation of U.S. tariffs, consumer products make up about 60% of the remaining tranche of about $300 billion in Chinese goods, according to the note by analysts David Choi, David Mericle, Blake Taylor and Ronnie Walker.

There’s about a 30% chance that Trump slaps tariffs on the remaining $300 billion of imports that aren’t yet targeted, Goldman said.

On the China trade war news, gold caught a bid too. Does it mean inflation will finally rear its ugly head? No fucking idea. However, what I do know is the perception is there now and the trade is long NUGT — taking advantage of the fear and the greed.