Tariffs Brewing Inflation Storm; Market Fails to See the Heat

Deutsche Bank has warned that investors are underestimating the inflationary risks posed by the Trump administration’s aggressive tariff policies, which have raised the effective average U.S. tariff rate to nearly 15%, according to recent estimates. Analyst Henry Allen, in a research note, argued that the market is failing to price in the full impact of these tariffs, despite evidence suggesting that inflation could soon exceed 4%. The prices paid component of the ISM services indicator has climbed to its highest level since October 2022, indicating potential inflationary pressure that is expected to manifest in the Consumer Price Index (CPI) within three months [4].

Consumer expectations also reflect growing concerns about higher prices. The Conference Board’s latest survey showed that inflation expectations rose to 6.2%, with respondents citing tariffs as a key factor in their outlook. Deutsche Bank noted that the inflation swaps market, where investors hedge against future inflation, has not reflected these expectations, with 1-year inflation swaps remaining largely unchanged since early April. This divergence between expectations and market pricing has raised questions about the preparedness of investors for the long-term inflationary consequences of the tariff policy [4].

The Federal Reserve has also expressed caution about the potential inflationary impact of tariffs. Minutes from the July policy meeting revealed that some Fed officials considered the possibility of cutting interest rates before the full effects of the tariffs become apparent. The uncertainty surrounding inflation persistence and the potential for a weakening labor market has complicated the Fed’s policy outlook. While the central bank kept rates unchanged at 4.25%-4.5%, it acknowledged the need to balance the risks of inflation and economic growth [5].

In contrast, some economists argue that the impact of tariffs on inflation has been overstated. A report by the Council of Economic Advisers noted that prices of imported goods have actually declined, and that the White House maintains the burden of tariffs falls on foreign exporters rather than American consumers. Additionally, many U.S. imports remain exempt from higher tariffs, with only 48% of imported goods subject to duties as of June. Retailers have also absorbed some of the initial cost increases, delaying price hikes for consumers [1].

However, experts warn that this trend is not sustainable. As tariff-exempt inventory is depleted and companies pass on higher costs, prices are expected to rise. The delayed impact of tariffs is also a factor, with studies showing that inflationary effects tend to peak roughly a year after implementation. This means the full effects of the tariffs could materialize later this year and into 2026 [1].

In sum, while the immediate inflationary impact of the Trump tariffs has been limited, the long-term risks appear to be growing. Deutsche Bank’s analysis highlights a disconnect between market expectations and the current pricing of inflation, suggesting that investors may need to reassess their risk exposure as the policy’s effects become more pronounced.

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[1] 4 reasons why the Trump tariffs haven't caused U.S. ... (https://www.cbsnews.com/news/us-tariffs-trump-inflation-prices/)

[2] It's time to unmask the Trump tariffs for what they really are (https://fortune.com/2025/08/26/trump-tariffs-us-economic-outlook-growth-inflation-debt/)

[3] Majority says tariffs, inflation erasing hard work: Survey (https://thehill.com/business/5471652-tariffs-inflation-erasing-hard-work/)

[4] Investors are ignoring the coming wave of tariff-driven ... (https://fortune.com/2025/08/27/deutsche-bank-investors-ignoring-tariff-driven-inflation/)

[5] Take Two: Fed minutes signal caution; Eurozone inflation ... (https://core.axa-im.com/investment-institute/market-views/market-updates/take-two-fed-minutes-signal-caution-eurozone-inflation-holds-steady)