Volatility Ahead: The Unsettling Reality of Tariff-Related Price Increases

Strategic Insights -

The latest "tariff deal" between the US and China has brought temporary relief to markets, but experts warn of a more prolonged and intense period of volatility ahead. As the new normal of 10 per cent across-the-board US tariffs shakes out, businesses are already experiencing the consequences of higher costs and squeezed profit margins. Retail giants like Walmart are raising prices on goods, and economists predict that this is just the beginning.

Key Takeaways:

  • The 90-day tariff pause may bring temporary relief, but it's unlikely to last, and the market may experience significant volatility in the coming months.
  • Anecdotal evidence suggests that profit margins have been squeezed, and even large retailers like Walmart are raising prices on goods due to Chinese tariff rates.
  • Walmart's CEO, Doug McMillon, stated that the retailer cannot absorb all the pressure from tariffs, indicating that other companies may follow suit.
  • The US Federal Reserve's chair, Jay Powell, warned of potential inflation volatility, citing the possibility of supply shocks.
  • America's poor fiscal position, with a $1.8tn deficit and potential debt increases, makes monetary policy insufficient to address the trend without a shrinking deficit.
  • A shortfall in tax receipts during a slowdown or recession could exacerbate the country's debt issues.
  • China and other countries have built up gold reserves in anticipation of decoupling from the dollar, which may lead to gold price increases in the future.
  • The combination of supply and demand shocks could lead to unpredictable outcomes, making government competence crucial in navigating this landscape.

Statistics:

  • The US tariffs on Chinese goods have introduced a 10 per cent across-the-board increase, which may lead to significant price increases.
  • Walmart has raised prices on electronics and toys due to Chinese tariff rates, and it expects further price rises.
  • The US Federal Reserve has expressed caution about potential inflation volatility.
  • The US has a $1.8tn deficit, and potential debt increases may exacerbate this issue.
  • The Committee for a Responsible Federal Budget estimates that the new budget bill before the House of Representatives would add $3.3tn to the debt over 10 years.
  • Gold reserves have increased in anticipation of decoupling from the dollar.

Sources:

  • Foroohar, R. (2020, February). The markets have survived the first test of 'Yankee go home', but geopolitics remains a major risk. Financial Times. (No date provided in the article)
  • TS Lombard managing director Steve Blitz's note to clients, (No date provided)
  • Powell, J. (Speech, 2020). Higher Real Rates: Reflections on the Possibility of a More Volatile Inflation Environment. (No date provided)
  • Walmart's CEO, Doug McMillon, (2020). Statement on tariffs and prices. (No date provided)
  • Committee for a Responsible Federal Budget, (2020). Budget Analysis. (No date provided)
  • Blitz, S. (Note to clients, 2020). (No date provided)