Additional tariffs on Canada and Mexico would likely lift core PCE inflation above 3% in 2025, with "more marginal effects beyond," analysts at Deutsche Bank highlighted.
Deutsche Bank notes that imports from Canada and Mexico make up about 4.7% of headline personal consumption expenditures (PCE) and 5.4% of core PCE. If a 25 percentage point tariff were fully passed through all production stages, it could raise the core PCE price level by 1.4% (5.4% of 25pp).
However, the extent of this passthrough is uncertain and depends on various factors, including currency fluctuations, product diversion, and retailer margins.
"In our outlook piece, we used a baseline passthrough of 75%, which would give a price level impact closer to 1%. This assumption was broadly in line with the aforementioned academic research studying the tariff pass-through during the first trade war," analysts noted.
"This would likely phase in over several quarters as importers, wholesalers, and retailers adjusted their prices, but could increase our 2025 core PCE inflation forecast from 2.6% to 3.7%.
"Given that these are price level increases, the impact on inflation beyond 2025 would be more marginal."
Trade between USMCA countries primarily involves intermediate goods, especially in the automotive sector, which may result in lower passthrough of tariffs. If a 50% passthrough is assumed, Deutsche Bank estimates that inflation in 2025 would rise by approximately 80 basis points, bringing the forecasted inflation to 3.4%.