UBS Warns Trump Tariffs Fuel 2.7% Inflation Surge in Core Goods

UBS Global Wealth Management has sounded a cautionary note on the economic implications of Trump-era tariffs, highlighting their growing influence on U.S. inflation dynamics. In its latest monthly letter, the firm observed that headline inflation surged to 2.7% in June—the steepest rise in five months—and identified the “core goods” category as a key indicator of tariff impacts. Mark Haefele, UBS’s Chief Investment Officer, likened the current economic scenario to a cinematic buildup of tension, where the delayed effects of tariffs are starting to materialize. Tariffs, now at their highest levels since the 1930s, are beginning to filter through to consumer prices, particularly in sectors like electronics, home furnishings, and apparel, where import-dependent industries are bearing the brunt [1].

The firm emphasized a lagged response mechanism: tariffs are imposed, importers stockpile goods, and costs are eventually passed to consumers. This delayed transmission means the full inflationary impact remains partially obscured in headline figures. Core goods inflation hit a two-year high in June, with price hikes concentrated in tariff-exposed categories. UBS warned that this trend could intensify in the coming months, as supply chains adjust and businesses absorb or pass on additional costs [1].

Retail data underscored this dynamic. Adjusted for inflation, sales in electronics and home furnishings dropped by 2% and 1.1%, respectively, as households curtailed spending in response to higher prices. Yet overall retail sales volumes remained resilient, rising 0.4% month-over-month, suggesting consumer spending has not yet cratered. This duality—falling category-specific sales versus stable aggregate figures—highlights the uneven distribution of tariff costs. UBS noted that the burden of tariffs remains uncertain: will it fall on exporters, importers, or end consumers? The answer likely varies by industry and market position [1].

Corporate earnings provided further insight. General Motors, for instance, reported a $1.1 billion loss in Q2 due to tariffs, leading to a 32% decline in core profit. The automaker is now recalibrating strategies—raising prices, cutting costs, and reconfiguring supply chains—but warned that prolonged tariffs could erode margins further. Across sectors, executives are increasingly addressing tariffs in earnings calls, signaling a shift from policy abstraction to tangible financial strain [1].

UBS’s analysis also flagged the Federal Reserve’s dilemma. If tariffs trigger a sharper-than-expected inflation surge, the central bank may face a difficult choice: prioritizing price stability could require aggressive rate hikes, potentially stifling growth. Conversely, absorbing costs internally to retain market share could depress corporate profits, further dampening investment and labor markets. The firm recommended monitoring core inflation, retail sales, and corporate margins to gauge how tariffs will redistribute economic costs [1].

Policy responses, such as tax cuts funded by tariff revenue, could mitigate some pressures, though the scale of such offsets remains unclear. For now, the delayed nature of tariff effects means their full impact is only beginning to surface. As UBS concluded, tariffs are no longer a theoretical debate—they are reshaping household budgets and corporate balance sheets, one price tag at a time [1].

Source: [1] [America is starting to eat Trump’s tariffs TACO salad, UBS says] [https://fortune.com/2025/07/25/trump-tariffs-taco-trade-inflation-core-goods-ubs-haefele/]