London
CNN
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Inflation is likely to rise in the United States and around the world if newly elected U.S. President Donald Trump follows through on his campaign promises to cut taxes, crack down on immigration and increase tariffs on all imported goods.

Combined with a Republican majority in the US Senate, Trump's historic re-election, which CNN predicted on Wednesday, is putting the former president in a bind in a strong position to implement his potentially radical economic agenda.

US stock markets opened sharply higher, buoyed by Trump's decisive victory. Treasury yields – or market interest rates – rose while the dollar strengthened against major currencies, in part as traders priced in higher domestic inflation and therefore fewer interest rate cuts from the Federal Reserve. (Higher interest rates tend to increase the value of a currency by attracting more foreign capital as investors aim for higher returns.)

Trump's proposed economic policies – including immigrant deportations, blanket tariffs and greater political influence over the Fed – if fully implemented, would “likely result in a significant decline” in U.S. economic output and “a sharp increase in inflation.” said Antonio Fatás, economics professor at INSEAD, a business school headquartered in France.

Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown, shared some of these views. The stronger dollar reflects expectations that Trump will cut taxes, raise tariffs and restrict immigration, all of which are inflationary and likely to lead to higher interest rates in the coming years, she wrote in a note on Wednesday.

“Investors are anticipating tariffs … that will drive up prices of imported goods for American buyers,” she added. Trump's “promise to kick out immigrants with waves of deportations could also have an economic impact, potentially driving up corporate labor costs.”

During the campaign, Trump proposed a tariff of 10% to 20% on all imported goods – a significant increase from the current average of 2%, or in many cases zero. It is for Chinese imports has proposed an even higher tariff of at least 60%. He has also imposed a 100% or 200% tariff on cars made in Mexico or on products from companies that move production from the United States to Mexico.

Tariffs act like a tax on imports, harming both consumers and companies that rely on imported raw materials so-called intermediate goods are required to produce finished products.

“We now only expect a Fed rate cut in 2025, with (monetary) policy on hold until the realized inflation shock from tariffs passes,” Nomura analysts wrote in a note on Wednesday.

The pain of Trump's tariffs will be felt far beyond U.S. borders. If America's trading partners retaliate with their own tariffs on U.S. imports, “this would lead to a significant increase in global inflation, while the resulting impact on global trade would have a negative impact on (economic) growth,” Investec said. Chief Economist Philip Shaw and Economist Ellie Henderson.

A stronger dollar could also put upward pressure on inflation globally. “As the dollar rises, countries that import goods at U.S. dollar prices may also experience price increases that either have to be absorbed by companies or passed on to customers,” Streeter said.

On the other hand, disinflation could be increased in economies with lower tariff rates than in “This means China is dumping its surplus goods in these countries,” said Anthony Kettle, a senior emerging markets portfolio manager at RBC Global Asset Management.

China and Germany in danger

BMI, a market research firm owned by Fitch Solutions, argues that Mexico and Canada could be in the “direct line of fire” when it comes to tariffs because their economies rely heavily on exports to the United States.

“We also believe that Trump could decide to impose even higher tariffs on economies that run large trade surpluses with the US,” BMI analysts wrote in a note on Wednesday. Mexico has a large trade surplus with its northern neighbor and, along with countries like China, Japan, Germany and South Korea, could face “increased pressure to boost demand for U.S. goods.”

BMI too said a 60 percent tariff on Chinese goods would hit China's economic growth by 0.5 to 0.8 percentage points over the next two years.

German exporters, for whom the United States is the largest single market outside the European Union, also face “significant losses” if Trump imposes 20% tariffs on all trading partners, the Munich Ifo Institute for Economic Research warned on Wednesday.

The institute assumes that German exports to the USA could collapse by around 15% as a result. “Donald Trump’s economic course will pose major problems for Germany and the European Union,” the institute said.