Trump 2.0 could be bad news for global inflation, analysts say

A second presidential term for former President Donald Trump could reignite global inflation as his America-first policies drive up costs across the world, analysts warned.

The high tariff, low tax economic agenda, which defined Trump’s first term — and is inflationary in its own right — would prove even more damaging this time around, the analysts said, as the “inflation mindset” persists.

“There’s a bigger risk that Trump’s policies will be more inflationary in a second term than they would have been in the first,” Michael Metcalfe, head of macro strategy at State Street Global Markets, told CNBC’s “Squawk Box Europe” on Tuesday.

“Compared to 2016, when inflation had been low forever and inflation expectations were low … 2024, 2025 is going to be very different,” he continued. “The level of inflation is higher, inflation expectations are higher, and we’re still in this inflation mindset.”

That could impact price rises both domestically but also well beyond U.S. borders, in Asia and Europe.

High tariffs are typically seen as inflationary because they raise the cost of imported goods, enabling domestic producers to increase their prices, leaving consumers to pay more. Tax cuts, meanwhile, can boost consumer spending, thereby driving up the cost of goods and services.

Both President Joe Biden and Trump have signalled that they would raise tariffs on China if elected as the geopolitical tensions grow between the two major partners.

A recent poll of economists suggested, however, that the majority see inflation ticking higher under Trump due to his hard-line protectionist stance. Those who saw inflation rising higher under a second Biden term attributed it to likely large spending packages.

That higher inflation could spill over into Asia, too, Nomura’s Gareth Nicholson said in a note to CNBC. A Trump presidency would mark an overall “negative risk factor” for Asia stocks, he said.

“Macro wise, it will be inflationary for global economy (perhaps even stagflationary), and will accelerate more supply chain shifts within Asia,” he wrote, noting that some companies have been diversifying their production to mitigate the impact.

In Europe, Goldman Sachs predicted in a Friday note that a Trump presidency could add a 0.1 percentage point increase to inflation as higher tariffs weigh on global trade.

Manulife’s Marc Franklin agreed, writing in a weekend note to CNBC that Trump’s inclination toward further tax cuts and a revisiting of Chinese tariffs could be a “somewhat reflationary mix.” As a result, he said he expects to see “a bias towards curve steepening” — an indication of rising inflation expectations and therefore higher interest rates.

Trump’s campaign for the presidency appeared to gain steam Monday as he emerged defiant at the Republican National Convention in Milwaukee, two days after surviving an attempted assassination at a rally in Pennsylvania.

U.S. stocks jumped Monday as investors reacted to the improved prospects for the pro-business Republican presidential nominee. However, analysts warned that the rally was likely to be short-lived given concerns over his protectionist geopolitical agenda.