Deutsche Bank: If the US imposes a 25% tariff on Canada and Mexico, the inflation index favored by the Federal Reserve may increase by 1.4%.

On Monday, Trump said that he might impose a 25% tariff on imports from Canada and Mexico as early as February. According to data from the US Census Bureau, Mexico and Canada were the two largest trading partners of the US in November 2024, accounting for 15.4% and 13.8% of the total trade respectively. In light of the possible 25% tariff, Deutsche Bank reevaluated an analysis report on the potential impact of tariffs on US inflation that it had previously released. In November last year, Deutsche Bank analysts Justin Weidner and Matt Luzzetti estimated that a 25% tariff imposed by the US on Mexico and Canada could raise the core Personal Consumption Expenditures (PCE) price index by about 1 percentage point in 2025. The core PCE price index is widely regarded as the inflation measure favored by the Federal Reserve. Deutsche Bank analyst Jim Reid said on Tuesday, "At the time, most people thought this was a negotiating strategy. But last night's temporary extension of the 25% tariff negotiations suggests that we should take this threat more seriously, even though there is still time to reach an agreement. Trump hinted that he might take action as early as February 1, so believing his words, this could be important after 11 days. Imports from Canada and Mexico account for about 4.7% of total personal consumption expenditures and 5.4% of core consumption expenditures. If an additional 25% tariff passes through all stages of production, the expected level of core PCE prices will increase by 1.4% (5.4% multiplied by 25%)." Reid added, "If there is a 50% pass-through, the forecast for the core PCE price index in 2025 would increase by about 80 basis points, and if there is a 75% pass-through, the forecast for the core PCE price index in 2025 would increase by about 110 basis points. Therefore, a strong rise in core inflation will be a headache for the Federal Reserve."