The aggressive protectionist measures announced by the US president over the past few days have generally been perceived as a prime inflationary threat. The reasoning is rather logical. An increase in import tariffs on non-substitutable goods that enter the production processes of key economic sectors or are purchased directly by US consumers will cause the price of those goods to rise. In addition, (i) the US balance of payments is likely to deteriorate and push down the dollar, and this might be exacerbated by potential difficulties in external financing, and (ii) the rest of the world might retaliate against the announced US measures, creating a domino effect. In theory, this combination is the perfect inflationary cocktail. How then can we explain that the markets have not shown greater expectations of inflation?
2018 has started on a confident note. After a very strong end to 2017, when global economic growth probably accelerated back over 4%, impressive indicators in early 2018 mean that there is no room for scepticism: growth looks like it is here to stay. There is plenty of evidence to support that view, including exceptionally loose monetary conditions at the global level, an upturn in business investment and international trade, a widespread decline in unemployment, and at least temporary support from the US tax reforms adopted late last year. To cap it all, wealth effects are increasingly visible, driven by exceptionally high valuations for financial and real-estate assets.