Tariff Twist: U.S. Trade Policy May Help Reduce U.K. Inflation

U.S. Tariffs May Cut Inflation in U.K., Bank of England Official Says:

A Bank of England official said that higher U.S. tariffs may cut inflation in the U.K.

President Trump has already imposed higher tariffs on numerous goods and nations and is set to announce additional ones in the near future. These tariffs will inevitably drive prices higher (inflation) in the United States. They may have the same effect in the United Kingdom if the British government retaliates by imposing tariffs on U.S. imports.

However, Bank of England policymaker Megan Greene set out on Tuesday how the opposite could happen. As other countries hunt for new buyers because of U.S. tariffs, the U.K. would benefit from cheaper goods.

“Tariffs generally make prices rise,” said Greene. “But if trade divert to new countries, that can actually reduce prices—and it can happen quite quickly.”

She also added that currency levels will play a role. A weaker British pound would lead to more expensive imports and higher inflation, while a stronger pound would be capable of driving it downwards.

Greene also expressed concern that U.K. households are expecting prices to keep on rising in the future, especially energy prices which are set to go up.

In February, the Bank of England kept interest rates steady after lowering them earlier this year. It has been more reluctant to cut rates than other European central banks.

“People have been expecting higher inflation for six months now,” Greene said. “That’s a concern.”.

U.K. inflation crept lower to 2.8% in February, but it is set to jump to 3.75% later in the year. When individuals expect prices to be higher, they may demand more pay—which has the effect of causing even more inflation.

Central banks try to hold expectations of inflation close to 2% to avoid that spiral.

By Editor-in-Chief, Timothy Gocklin, MBA, MSF