How tariffs are reshaping inflation

By the OFX team | 6 August 2025 | 6 minute read

After previewing the “Liberation Day” tariffs earlier in the year, another round of tariff turmoil has leaders getting used to the modus operandi of US President Donald Trump: hit countries with tariffs, and bring them as supplicants to the table, to try to secure a trade deal, or face tariffs set by Washington. This month, more than 60 countries are facing that reality.

New tariff measures and country impact

The tariff rates appear fickle. For example, India is facing a 25% impost on its exports to the US; Taiwan, 20%; the European Union, 30%; Brazil, 50% on a range of exports, including coffee, beef, and petrochemicals; South Africa, 30%, and Switzerland, 39%. The deadline for a tariff deal with Mexico was extended by another 90 days.

But President Trump loves doing a deal, and conducting US policy through Truth Social, the social media platform owned by his Trump Media & Technology Group. European Commission President Ursula von der Leyen flew to one of his golf resorts in Scotland for talks, emerging with an agreement that included a 15% baseline tariff for most EU exports to the US.

It wasn’t just country-specific; there were also 50% levies on all steel, copper, and aluminium imports to the US. Although the copper tariff only applied to semifinished copper products, like cables and electrical wiring, and not to imports of refined copper products, including copper ore, concentrates and cathodes – the most widely traded forms of the red metal – this was seen as an unexpected reprieve that took 22% off the copper price. There were also tariff exemptions for imports of smartphones, computers and other electronics.

In short, it is chaos.

Tariffs are used to support local industries by making foreign products more expensive (some commentators suggest that Trump is also using them as leverage to achieve his foreign policy aims). They’re paid by importers, to the Customs and Border Protection agency at the port of entry, but in practice, responsibility for payment of any tariff will be agreed between the shipper and recipient in advance, and will form part of the shipment’s terms.

Business and consumer reactions

In general, tariffs on US imports do increase product costs, and will show up in the price that US consumers pay for the goods in the shops. But not all tariff increases are fully passed on to consumers in the form of higher prices. Some companies will choose to accept lower margins to protect market share and customer loyalty. (In response to act one of Trump’s tariffs, in his first term in 2018, the Chinese government subsidised some factories to help them absorb the tariffs.) Companies in the import-export supply-chain have a broad array¹ of actions they can take, including changing their sourcing. But generally speaking, tariffs push up prices: according to the US Federal Reserve, the tariffs implemented on China in February and March 2025 have already affected² consumer prices. As of May, the effect of these tariffs has been a 0.33 percentage point increase in core goods Personal Consumption Expenditures (PCE) prices, contributing to a 0.08 percentage point increase in core PCE prices.

According to the Allianz Trade Global Survey 2025³, 4,500 companies across nine countries – including the US, the United Kingdom, and China – 60% of the companies foresee a negative impact from the trade war, and 45% anticipate a decline in export revenues. Only 22% of the firms stated that they could absorb the cost of the tariffs without passing it on to the consumer.

There are “few signs of foreign exporters absorbing the US tariff hikes,” reported American multinational financial services company Wells Fargo⁴ in mid-July.

Already, a Who’s Who of the US consumer marketplace has announced plans to lift prices. Nike⁵ announced price increases across its range, from US$2 to US$10 depending on the item, taking effect starting in June, to offset US$1 billion in additional tariff costs in financial year 2026. Last month, Adidas⁶ CEO Bjørn Gulden said tariffs “will directly increase the cost of our products for the US,” adding that the tariffs could cost the company €200 million euros, or about US$218 million, in the second half of the year. Gulden said the company still did not know what the final tariffs in the US will be, as final rates had yet to be determined on countries from which Adidas sources much of its products, such as Vietnam, Adidas’s largest sourcing country, and its second-largest, Indonesia.

In May, Walmart⁷ Chief Financial Officer predicted higher prices were coming for the company’s customers, telling CNBC “We’re wired for everyday low prices, but the magnitude of these increases is more than any retailer can absorb. It’s more than any supplier can absorb.” For its pains, Walmart recieved backlast from the President, via Truth Social⁸. The President wrote that Walmart should, “…stop trying to blame tariffs as the reason for raising prices throughout the chain.”

Essential baby goods⁹ have been especially hard hit, leading to a Democrat charge of a “tax on babies.” The alleged counter-productive effects of the tariff policy were highlighted by the Washington Post¹⁰ in June when, reporting on otherwise relatively rosy May inflation and jobs figures, it said: “There are signs that tariffs are already rekindling inflation in some categories, including toys, which overwhelmingly come from China. Prices for toys, games, and playground equipment rose by 2.2% in May, the largest one-month increase on record. Several goods that were getting cheaper when Trump took office – including consumer electronics and toys – have all instead risen in price by about 0.5% since January”, according to Ernie Tedeschi, who served as a top economist in the Biden administration.

Inflationary effects of tariffs

But it is inflation going forward where we should really be able to see the impact of tariffs, especially the August announcements. In June, the Federal Reserve’s preferred inflation measure, PCE, ticked higher, with CBS News¹¹ reporting that President Trump’s tariffs are pushing some prices higher. Prices rose 2.6% in June compared with a year ago, said the Commerce Department, up from an annual pace of 2.4% in May. Excluding the volatile food and energy categories, prices rose 2.8% in the past year, the same as the previous month, which was revised higher.

The higher tariffs are expected to be inflationary, unless companies choose to absorb the costs – a strategy a minority may be able to adapt to protect market share, but it is unlikely to be a sustainable approach. As President Trump recasts global trade dynamics, and does his beloved ‘deals’, the inward US investment he charges nations to “buy down” their tariff rate – some analysts expect that this will contribute to increasing upward pressure on US inflation.

Monetary policy and currency implications

And if there does prove to be persistent tariff-driven inflation, this could influence central bank monetary policy decisions and, consequently, currency valuations. As the new US tariff rates take effect in August, global central banks are all evaluating their impact on economic activity before making policy decisions.

Central banks in the US, Europe, and Japan kept interest rates unchanged in their latest policy decisions. In addition to assessing growth and inflation, the new reality for these banks is that they must deal with the potential economic impact of US trade policies. The ‘US exceptionalism’ story is being challenged by markets on the back of uncertainty over the country’s policies and rising fiscal deficit and debt; and de-dollarisation is potentially bringing a significant reduction in the use of US dollars in world trade and financial transactions, decreasing national, sovereign, institutional and corporate demand for the greenback.

What does that mean for currencies?

Permanent change in how the US dollar is viewed would take a long time to become apparent; and in the meantime, short-term FX views appear to be based on the US dollar continuing to enjoy broad support – with those currencies that strengthen against it appearing limited in the gains they can make.

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