Chart of the Week
The cascade of tariff hike announcements has had an almost immediate impact on firms’ and households’ inflation expectations. Firms report that they could raise prices in response to increasing costs.
Tariff hikes typically induce a one-time price shock and lead to a transitory rise in inflation, i.e. a bump in year-on-year price changes. But following years of high inflation, could this price shock have a lasting effect on expectations?
Inflation swaps enable investors to hedge against future price fluctuations. Their shifts reflect market-based long-run inflation expectations adjusted for liquidity constraints.
OUR ANALYSIS
Inflation expectations currently align with a temporary shock scenario. They indicate a one-year inflation forecast of 3% followed by stable inflation of around 2.5%, which is close to the level observed before Donald Trump won his second term.
Alberto Musalem, president of the St. Louis Fed, has signalled a risk that the inflationary effects of tariff increases could prove sticky due to indirect effects. He shares this view with Chicago Fed President Austan Goolsbee, who believes that an uptick in the market’s long-term inflation expectations would be a major red flag. As things stand, this is not the case.
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Written on 28 March 2025. This is not an investment advice. Opinions subject to change.
See also: https://latribune.lazardfreresgestion.fr/en/european-equities-regain-their-footing/
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