With markets so far taking in stride the news that Trump has pledged a hike in tariffs to the "NAFTA neighbors", it seems apt to rehash a two-month old analysis from Deutsche Bank’s Justin Weidner and Matt Luzzetti, who highlighted back in late November that 25% tariffs on Mexico and Canada could add around one percentage point to 2025 core PCE.
At the time, most people saw this as a negotiating tactic. But as DB's Jim Reid notes, the off-the-cuff renewal of the 25% tariff talk last night suggests we should take the threat more seriously, even if there's still time for a deal to be done. Trump suggested he could make the move as soon as February 1st, so taken to his word it could be an important 11 days ahead.
Here are the facts: US imports from Canada and Mexico represent about 4.7% of headline personal consumption expenditures and 5.4% of core. Should that extra 25% tariff be passed along through all stages of production, that would be expected to increase the core PCE price level by 1.4% (5.4% times 25%).
