By Howard Schneider

Washington (Reuters) – The impact on inflation of an increase in customs duties remains vague, but US monetary policy officials are starting to worry about the repercussions of the new American administration on anticipations of inflation inflation , supply chains and prices.

The American government has noted customs duties on Chinese products and multiplies threats against its trading partners, adopting a fragmented approach more destructive for the economy than an occasional increase in customs duties, explain those responsible for The Federal Reserve (Fed). Households and companies must then adapt to an uncertain environment in which prices seem to be doomed to progress.

The risk is that inflation anticipations will unravel, contributing to a stronger price instability, explains the Fed, while the US administration defends its tariff projects by arguing that they will lower inflation.

“Most increases in customs duties represent a punctual shock on the world economy, which then moves on to something else,” recalls Raphael Bostic, president of the Atlanta Fed, earlier this month.

But if these customs measures, their implementation and possible responses drag in length and affect inflation anticipations, “it will be relevant to react” through monetary policy, added the governor.

Conversely, Christopher Waller, member of the Governors’ Council, said on Monday that he did not anticipate a lasting recovery of inflation triggered by customs duties, adding that central bankers were to react to data that arose to them.

Positioning yourself for certain events in a period of high volatility is a good way to “trigger paralysis of monetary policy”, added the manager.

The report of the last Fed meeting, expected Wednesday at 7:00 p.m. GMT, could give more elements on the way in which the central bank is positioned on these tariff issues. The Fed had met for the last time a week after the inauguration of Donald Trump and was reluctant to comment on the measures of the new administration, in a context of increasing uncertainty.

Adjustments

A study by the Boston Fed concludes that an increase of 25% of customs duties on imports from Mexico and Canada, and 10% on Chinese imports, would add 0.8 percentage point to inflation inflation American.

This calculation does not take into account the many adjustments that customs duties will cause: households may prefer other products or less consuming, companies absorb price increases or pass on to final prices, other countries retaliated, While changes and interest rates will adapt to this new deal.

“The negative impact on growth could limit repercussions on inflation,” underline the authors of the study.

During the first term of Donald Trump, companies had absorbed cost increases, but Fed officials specify that the private sector is ready this time to transmit the increase in imports to the final consumer, the experience of the Pandemia Having highlighted an important price to fix prices.

“I believe that companies will be more likely to transmit the cost increases than five years ago,” said Thomas Barkin, president of the Richmond Fed. Once this process is underway, “we must be concerned about the evolution of inflation anticipations”, because consumers remain marked by the episode of high increase in post-pandemic prices.

“Overall, (…) Prices will progress and activity will slow down,” said Andrea Raffo, director of research at the Fed of Minneapolis. “The magnitude of these repercussions will depend on the goods that will be taxed and if it is easy to find substitutes for them”. Uncertainty will add to growth in growth.

OFFER

A survey carried out after the election of Donald Trump by economists Olivier Coibion, Yuriy Gorodnichenko and Michael Weber showed that third -party companies were ready to take up its prices, while half of those surveyed expected a price progression . Only 28% of respondents consider Donald Trump’s argument plausible, according to which foreign companies will absorb customs of customs rights.

For the moment, the confidence of markets and consumers in the ability of the Central Bank to master inflation does not seem to erode, notes the Fed officials. The rate of the central bank is still at a level considered to be restrictive, contributing to a reflux of inflation.

However, alert signals are starting to appear.

The Michigan University survey has made a leap in consumer inflation anticipations, although another feeling survey by the New York Fed has not shown a comparable increase. Market inflation anticipations have also progressed, although the president of the Fed, Jerome Powell, and other monetary policy officials believe that these levels remain compatible with the achievement of the inflation objective.

The exceptional state of the American economy, marked by low unemployment, economic growth greater than its historic trend, resistant consumption expenditure and businesses ready to take up their prices, prevents you from the teachings of the first mandate From Donald Trump, during which growth remained lower than potential and inflation within 2%.

Austan Goolsbee, president of the FED of Chicago, recalls that the economy first quickly adjusted to the first price shocks.

“In 2018, companies undoubtedly relocated everything that could be easily outside China, and there may be only the least substitutable goods. In this case, the shock on inflation would be more important, “explains the monetary policy manager. Repercussions on supply chains complexes should not be underestimated either.

The pandemic has shown that turbulence and the readjustment of these logistics chains could produce lasting pressure on prices.

“The whole section of supply in the economy cannot be overlooked,” concludes Austan Goolsbee.

(With Ann Saphir, Corentin Chappron, edited by Kate Entringer)

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