U.S. tariffs fuel domestic inflation but ease global price pressures China faces deflation as trade shifts reshape exports

U.S. import tariffs imposed under President Donald Trump have not yet driven up inflation as significantly as expected domestically, but they remain a key hurdle for the Federal Reserve’s anticipated rate cuts. The latest data shows that the U.S. consumer price index (CPI) rose 2.7% annually in July 2025, slightly below forecasts, with core CPI accelerating to 3.1% from 2.9%. Despite these trends, analysts from Capital Economics suggest that the full inflationary impact of the tariffs will build over the remainder of the year as companies shift from absorbing costs to passing them on to consumers [1].

The global effects of these tariffs, however, tell a different story. While U.S. companies have absorbed initial cost increases, global importers—especially those outside the U.S.—have not seen the same inflationary pressures. In fact, the lack of retaliatory tariffs from most countries and some reductions in import duties on U.S. goods mean that the global economy could experience a mild disinflationary effect. Capital Economics’ Simon MacAdam and Ariane Curtis noted that the redirection of Chinese exports to non-U.S. markets and the softening of global demand could reduce import prices for many countries [1]. This divergence highlights how the U.S. trade strategy is affecting different economies in distinct ways.

Robin Brooks, a senior fellow at the Brookings Institution, emphasized that China will face a sharper impact. With U.S. tariffs on Chinese goods being among the highest globally, the country—already struggling with weak consumer and producer price growth—could see a more pronounced deflationary effect. Brooks observed that Chinese exports to the U.S. have dropped significantly, while exports to other regions have surged. This shift forces Chinese companies to either transship goods via third countries—increasing costs—or lower prices to remain competitive in alternative markets, both of which cut into their profits [1]. For a country heavily reliant on exports, this creates a troubling outlook.

Meanwhile, the broader global trade system faces a period of redefinition. As U.S. tariffs reshape trade flows and pricing structures, the need for updated trade agreements becomes more urgent. Some analysts argue that the post-trade war era will require a more flexible and cooperative international trading framework to address the shifting dynamics brought about by Trump’s protectionist policies [2].

The U.S. producer price index (PPI) has already surged in response to the tariffs, rising 0.9% in July—far exceeding expectations. This indicates that wholesale prices are being significantly impacted, adding to the pressure on the Federal Reserve as it attempts to balance inflation control with economic stability [5]. Domestic consumers are also adjusting their behavior: U.S. retail sales increased 0.5% in July as shoppers anticipate future price hikes, reflecting a forward-looking response to the uncertainty created by trade policy shifts [3].

In summary, while U.S. tariffs are contributing to inflationary pressures at home, the rest of the global economy may benefit from a mild disinflationary effect. China, however, is an exception—its export-dependent economy is particularly vulnerable to the deflationary consequences of the trade war. As these dynamics unfold, the coming months will be critical for policymakers navigating the complex and evolving landscape of global trade and inflation.

Source:

[1] U.S. tariffs may cool inflation for the rest of the world, https://fortune.com/2025/08/15/us-tariffs-cool-inflation-global-economy-trump-trade-war-china-deflation/

[2] What Comes After the Trade War, https://www.cfr.org/article/what-comes-after-trade-war

[3] Retail sales rise 0.5% in July as some shoppers step up ..., https://www.hngnews.com/nation_world/retail-sales-rise-0-5-in-july-as-some-shoppers-step-up-purchases-ahead-of/article_30ba99aa-9ad8-5524-881d-bb2959cf0f8e.html

[5] U.S. producer prices surge in July as Trump tariffs push ..., https://www.chron.com/business/article/u-s-producer-prices-surge-in-july-as-trump-20817230.php