Annual consumer price inflation in October heated up a hair at 2.6%, bringing concern disinflation may have stagnated too far away from the Federal Reserve’s 2% target. In September, consumer prices rose 2.4% on an annual basis.

Bank of America economists said ahead of Wednesday’s report, “Inflation is moving sideways after a period of substantial disinflation.”

“I think people are worried that we’re not just sideways, we’re plateauing, and that we’re going to go back up,” said Mary Lovely, a senior fellow at the Peterson Institute for International Economics.

While the price of goods has gone down over the past year, services inflation is driving overall consumer prices higher. That said, both categories could see inflationary pressures in 2025.

“A lot of President-elect Trump’s program is, in fact, expansionary. [That’s] one reason why we’re worried about inflation,” Lovely said. “If the economy is growing well, people’s incomes are rising; firms may feel more comfortable passing those [costs] along, even preemptively.”

Lovely said Trump’s deportation policy would affect the size of the labor market and wages, putting inflationary pressures on places where undocumented workers typically fill jobs. But another policy takes the top spot.

“Tariffs would certainly be No. 1 on my list for what’s going to be inflationary,” Lovely said.

Trump’s campaign has argued many things related to his tariff policies that go against this statement. He and the campaign point to his first term and China tariffs that they say didn’t contribute to inflation. He has also long argued that foreign countries, not Americans, bear the cost of tariffs.

In Trump 2.0, the president-elect has proposed 60% tariffs on China and 10%-20% across-the-board tariffs on other trade partners.

For a closer look at the impact of these proposals and why a second trade war may play out differently than Trump’s first term, Straight Arrow News interviewed Lovely, an expert on U.S.-China trade relations.

The following transcript has been edited for length and clarity. Watch the interview in the video above.

Mary Lovely: My research focuses on U.S.-China trade flows and trade relations and also on the Chinese economy. Obviously, with this being an election year, I’ve done a lot of work on tariffs and what they might mean for consumer prices, for who pays the tax burden, especially as President-elect Trump has talked about replacing some of the income tax with tariff revenue.

Simone Del Rosario: And Trump has proposed a lot of tax cuts. Several things on his proposal list are, in nature, inflationary. Tax cuts, increased spending in the private sector, and then, of course, tariffs,

Mary Lovely: Yes, of course. Tariffs would certainly be No. 1 on my list for what’s going to be inflationary. He’s promising them at high rates, so on China, 60%, and we can talk about which goods and services is that really going to affect. And he’s promised them quickly, so we may see them as early as Q2 of next year. People know that’s coming, and that will be built into expectations for prices and rates.

Simone Del Rosario: Would you expect companies to be raising prices ahead of President-elect Trump even going into office?

Mary Lovely: I think that companies want to raise prices when they feel consumers are able to accept them. So it may be when they’re bringing out a new model, or when they’re just refreshing their price list for customers, if they’re dealing with industrial customers or if they think the economy is moving ahead really well. And we may see the economy growing a little bit faster – it’s already doing really well – but a lot of President-elect Trump’s program is, in fact, expansionary; one reason why we’re worried about inflation. And so if the economy is growing well, people’s incomes are rising, firms may feel more comfortable passing those along, even preemptively.

Simone Del Rosario: We know that President-elect Trump is promising big tariffs. This has been a cornerstone of his economic policy. I’ve talked to a lot of economists on all sides of the aisle, and some people are saying, ‘Well, I think he’ll end up doing something more targeted.’ Based on what he’s told us, he wants across-the-board tariffs, and he wants really high tariffs on China and perhaps Mexico as well. That said, what are you expecting the tariff landscape to be like? Do you expect it to be as high as his campaign promises? Do you expect there to be a little bit of moderation in what happens? What are you expecting?

Mary Lovely: This is a great question, Simone, and I think we’re all trying to look into the crystal ball and make some guesses here, right? Because there’s a lot of factors that will go into what he actually does. A lot of people also say he’s a dealmaker, so we may see him threatening these tariffs but not actually carrying them out. Given the people that he’s beginning to appoint and reports [of Trump wanting Robert Lighthizer to be his trade czar], who was his trade representative in the first term, we expect tariffs will be right at the top of the menu.

Regarding the tariffs on China, where former President Trump, as candidate Trump, promised a flat 60, I expect we’ll see action quite quickly, and that is because he’ll tack these on to the original Section 301 case against China. That was the legal authority that gave him the power to put those tariffs on starting back in 2018. Some folks may remember a couple of months ago, President Biden put 100% tariffs on Chinese EV imports, and that was done under the same authority, even though EVs had nothing to do with the original 301 case.

So President Trump can come in and have a pretty clear runway to put tariffs on China. The 10% across the board is a much harder thing. He is likely to have control of both houses in Congress. Congress ultimately has the power to tax. He may have to get authority from Congress to do that. It is quite unusual for us to start raising tariffs across the board on allies like Great Britain, Japan and South Korea. It’s a whole different kettle of fish.

Simone Del Rosario: Let’s focus on the China aspect for a little bit. We’ve heard from Trump’s campaign that these tariffs are not going to raise inflation. They point to his first term and say, ‘Look, we already did this. We already put tariffs on China. You all said it was going to raise inflation and it didn’t.’ So should we believe that?

Mary Lovely: No. That was an easy question.

Simone Del Rosario: And why is this different?

Mary Lovely: Basically what we do is we look at the prices of things when they come across the border, and we say, ‘Are these higher? Are they higher by the amount of the tariff?’ And the answer is, the price that we paid the foreign exporter, i.e. the Chinese manufacturer, didn’t change, and then we paid the tax. So the answer is, every study found that the importer paid 100% of the new tax.

Now was all of that passed through to the final consumer? Well, that’s a long road, because a lot of these products that we get from China are inputs, things that manufacturers use, so something like a small electric motor that’s then used in a a metal fishing boat, for example, little boat you might take out with your dad or your granddad to fish. That boat has content in it that comes from China, and we all know that, and those prices go up, and then it gets reflected in the alternate price. So we have to track it through that complicated route. Even goods that come across the border seem simple. They’re going to go on the shelf in Target or WalMart, but then we get retailing costs on top.

Some of that was passed through right away to consumers, and some wasn’t. Companies have to decide, ‘Do I take a little bit of profit, don’t turn away my customers, make sure they keep coming to my store, or do I pass it all through now because I really don’t have the ability to bear it myself?’ And what we saw was it was partial pass through to consumers, but that whole process was really shortcut by the pandemic.

So what will happen in the long run is – we don’t have good information from the Trump One tariffs, but we do know that those costs were paid by Americans somewhere along the value chain. So I think that saying that it’s foreigners who pay it is just simply not supported by any evidence. It’s sort of wishful thinking.

There’s another part to this, which I think may be less well appreciated by folks, which is that not only is most of what we get from China used by U.S. manufacturers, and the higher costs hurt them, and we have documented evidence that it led to layoffs in companies that used a lot or a decrease in employment in a lot of places that used a lot of these inputs, but a lot of the bundle is electronics and things like laptops, cellphones, game systems, your Apple Watch, and these were not taxed at all. So if he’s talking about a flat 60%, it’s going to go on these consumer electronics. And it’s going to be huge. Some things are already taxed at 25, you’re going to see it’s an incremental tax. It’s going to be a huge tax. And so that makes me think that maybe he might back off a bit, or do it in stages.

Simone Del Rosario: We are already hearing companies look to this new reality and see how to move forward. AutoZone’s CEO told analysts they’d raise the prices ahead of tariffs. Other companies are saying, ‘We’ll wait for the policy, but yes, then we’re still going to have to raise prices.’ Steve Madden said that they were going to cut the amount of goods they were importing from China and rely more heavily on different partners. Part of tariff policy is adjusting trade relationships. So do you think that these Trump tariffs will, in turn, bring manufacturing back to the United States or take it away from China?

Mary Lovely: Well, I think it will take it away from China. We did see a decrease in the U.S. purchases of goods that were taxed. That makes sense, right? You put a tax on one store, you go to another store, but we saw most of that stuff move to other countries and we had to pay higher prices for it, because they’re just not as good at making it or they had to create a factory out of nothing. So it went to Vietnam. It went to Thailand. Very little of it came back to the United States. And that’s because you think about the products that are being made: Do you think that you can make a table cloth, T-shirts, in the U.S. and pay a living us wage and still compete with something from Bangladesh or Vietnam? The answer is no, you can’t.

So we are going to see higher prices, we’re not going to see a lot of jobs. Now, if he goes to 60%, some companies will come back, absolutely, or we’ll get foreign investment in the United States. And that’s another reason why we might see higher inflation, because we’re going to see some foreign investment in the United States.

People will say that’s the tariffs creating jobs, yes, but it’s going to be at much higher prices, which means that you won’t be able to buy something else. That’s the part that I think is more difficult to grasp, the idea that if I have to spend a lot more buying apparel, buying clothes for my kids, well then I can’t spend it at the grocery store. I can’t spend it on local services like eating out. And we’ve traced through that and on net, the tariffs are job losers. There’s just no way around the evidence.

Now people are okay with that, because, as you mentioned, part of the idea is to move supply chains away and reduce our dependence on China. It’s true, it’s an important goal, but it’s going to be costly, and we shouldn’t pretend that it’s all sunshine, it’s going to be lower prices and more jobs, because it just doesn’t make sense economically, that that’s how it will happen.

Simone Del Rosario: And would China retaliate? What would that look like and how would that affect us?

Mary Lovely: Well, if China retaliates, obviously it’s going to make it harder for U.S. companies to sell abroad, and the U.S. is the second largest manufactured good exporter in the world. We haven’t talked a lot in this election about how we are actually an export superpower, so that will make it harder for U.S. companies. How China retaliates is really hard to guess. Last time they did a bit of tit for tat, and we may see that. I think if President Trump goes ahead with tariffs, broad based, 10%, 20%, on our friends and allies included, we will see swifter retaliation.

Everyone has been calling President Trump, polishing up their golf games, trying to make nice, hoping that this doesn’t come. And I think we’ll see an awful lot of diplomatic activity before that. But in the end, if we do go through and actually levy those tariffs, I think we will see retaliation. We’ll have to, because these countries can’t let the U.S. do this without making it clear that they protest.

Simone Del Rosario: Given everything you’ve laid out, I’m hearing very clearly that prices are going to be going up. Should the Fed be moving accordingly and stop cutting its rate in anticipation that there are going to be inflationary pressures coming? Because multiple parts of his policies suggest that.

Mary Lovely: Even if they do cut, we’re likely to see rate increases in 2025. Lots of the Trump program, the tax cuts, as I mentioned, more foreign investment into the United States, the deportations, which will hurt on the supply side, all point in one direction, which is higher inflation.