Since Donald Trump proposed a comprehensive tariff plan after being elected president of the USA, economists, politicians, and business leaders have frequently warned that this will lead to a resurgence of inflation in the USA. Especially after Trump proposed the "first batch of plans" last week, such warnings have been incessant.

However, how much will Trump's "tariff stick" actually raise inflation in the USA? Wall Street is currently attempting to quantify this impact. Recently, Trump threatened to impose a 25% tariff on all products entering the USA from Mexico and Canada by executive order on his first day in office next year.

Based on the preliminary plan he announced, Deutsche Bank conducted an analysis. Jim Reid, the global head of macro and thematic research at the bank, noted in a report released on Wednesday that if additional tariffs "pass through all stages of production," the core PCE price index, which is the Fed's preferred inflation metric, could rise by about 1.4 percentage points.

The report also states that if the above tariffs are 50% "passed on to the production stage," the bank's forecast for the core PCE price index in 2025 will increase by about 80 basis points; a 75% "transmission effect" will lead to an increase in Deutsche Bank's forecast of about 110 basis points.

Reid points out that tariff risks foster the "strong potential uplift" risk of the core PCE price index. He wrote: "This will be a more troublesome issue for the Fed." The Fed uses a range of indicators to assess inflation, but particularly favors PCE data, which is considered broader than the Labor Department's CPI data and is adjusted according to consumer spending behavior.

The Fed has been committed to lowering the US inflation rate to the target level of 2%, but recent inflation seems to be on the rise again. The latest data released by the US Bureau of Economic Analysis (BEA) on Wednesday showed that the October PCE price index rose by 2.3% compared to the same period last year, in line with market expectations of 2.3%, rebounding from the previous month. The core PCE price index, excluding energy and food prices, rose by 2.8% year-on-year, also in line with expectations.

Reid noted in the report that currently, Deutsche Bank's research department believes that "the price level will not rise further in 2026." However, he stated that the situation is "complex" and the risk lies in that other tariffs may lead to "a general upward adjustment of price expectations."

The resurgence of inflation will undoubtedly impact the Federal Reserve's interest rate cut outlook. In a report released earlier this week, Deutsche Bank's Chief Economist for the USA, Matthew Luzzetti, predicted that the Federal Reserve will make its final rate cut of 25 basis points in December this year, after which the central bank will pause on rate cuts for the entirety of next year.

He pointed out that the policies proposed by Donald Trump will keep the inflation rate above 2.5%, as tax cuts would drive economic growth and spending, while Trump's trade protectionist plans could accelerate inflation.

However, whether Trump will ultimately "deliver on his promises" remains uncertain. Reid stated, "As President-elect, Trump has several potentially conflicting economic policy goals, and how he balances these goals during his presidency will affect global economic growth and asset prices in 2025 and beyond."

"If the new government's main focus is to promote economic growth, it is likely to have a very positive impact on the USA and spillover effects on other parts of the world. However, this may require a reduction in attention to campaign promises related to deporting undocumented immigrants and tariffs," he added.

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