Following Donald Trump’s decisive victory in the US presidential election, global markets are adjusting to the anticipated impacts of his economic agenda. Known as “Trumponomics,” this approach is expected to combine fiscal stimulus, tax cuts, and sweeping import tariffs. While these policies aim to drive US growth, they also bring inflationary pressures that could have global ramifications, including in the UK. As the Bank of England (BoE) navigates its monetary challenges amid inflation and a slowing economy, it is crucial to understand the implications of Trumponomics and stubborn UK inflation dynamics.

Trump’s Tariffs and Their Inflationary Impact

Central to Trump’s policy platform is aggressive tariffs on key trading partners, including China, the EU, Mexico, and Canada. Analysts expect these tariffs to raise the effective US tariff rate by around two percentage points to approximately 5% by 2026. If implemented, these tariffs could add roughly 0.8 percentage points to core US inflation, bringing it close to 3% by late 2025. While the inflationary effects of tariffs may take time to materialise, they are likely to compound the challenges facing the Federal Reserve, which has already shown signs of caution as it gradually eases interest rates.

The Fed’s latest rate cut, 25 basis points to 4.625%, indicates a more measured approach to monetary easing, given the inflationary risks from fiscal expansion and potential tariff-driven price increases. The Fed’s reaction underscores the balancing act central banks face: they must support growth without allowing inflation to spiral.

Implications for the UK Economy and the BoE’s Policy Stance

Trump’s trade policies and the Fed’s gradual rate cuts could impact the UK mainly through upward pressure on the dollar. A stronger dollar would likely weaken the pound, making imports more expensive and adding to inflationary pressures in the UK. Oxford Economics suggests that the dollar’s strength could persist, driven by the US’s real yield advantage, which may result in a 1% decline in the trade-weighted value of sterling and add 0.1 percentage points to UK inflation.

In response, the BoE has recently lowered the Bank Rate by 25 basis points to 4.75%, aiming to support the UK economy. However, the BoE’s cautious outlook reflects ongoing concerns around inflation, driven by both domestic wage growth and potential spillovers from US policies. The recent UK Budget, with its planned fiscal expansion, could also sustain inflationary pressures, limiting the BoE’s ability to cut rates as aggressively as previously anticipated. The BoE expects to deliver only three rate cuts in 2025 instead of four, signalling a tempered approach in response to global and domestic factors.

Stubborn Wages and Prices Challenge the BoE’s Easing Path

The latest data from the BoE’s Decision Maker Panel (DMP) shows that inflationary pressures within the UK economy remain persistent. While firms reported a slight decline in year-over-year price increases—from 4.2% in September to 4.0% in October—they still plan to raise prices by 3.6% over the coming year, showing little sign of easing. This stabilisation in price expectations suggests that services inflation may not slow as much as the BoE had hoped.

Additionally, UK firms expect to increase wages by 4.1% over the next year, exceeding the BoE’s forecast of 3.25%. Although recruitment challenges are easing, wage expectations remain firm, highlighting structural pressures in the labour market that could keep inflation elevated despite the BoE’s efforts to ease policy. These data points reinforce the BoE’s cautious stance, as it carefully considers the pace and scope of future rate cuts.

A Revised Global Growth Outlook and Sectoral Impacts

The global economic outlook is increasingly complex, as Trump’s fiscal expansion and tariffs are expected to boost US growth while temporarily creating headwinds for international trade. Oxford Economics notes that while US-led fiscal stimulus may initially lift global growth, this effect could be offset by protectionist policies that strain specific sectors, particularly autos, steel, and technology, which rely heavily on global supply chains.

The anticipated tariffs and dollar strength may exacerbate stagflationary risks for the UK—high inflation and low growth. This scenario poses a unique challenge to the BoE, which is tasked with balancing support for the economy against the risk of imported inflation and persistent wage pressures. The potential for more extensive tariffs and the continued volatility in global markets underscore the importance of a cautious, adaptable policy approach.

Conclusion: A New Chapter for Policy and Sectoral Resilience

Trump’s return to office and his revival of Trumponomics, combined with the UK’s inflationary challenges, will shape the economic landscape, posing complex challenges for policymakers. As the Bank of England prepares for its subsequent decisions, it must navigate the interplay of imported inflation from the US and domestic wage and price pressures. The BoE’s task is to assess these risks carefully to avoid exacerbating an already fragile economic environment.

There’s much to unpick in this uncertain macroeconomic climate before the actual impact on sectors like automotive is fully understood. But if history is any guide, the automotive industry has always faced challenges.

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