Inflation is a cause for concern in both America and Europe. The economic circumstances are different, but that only makes it more compelling to compare the two economies. There is also another reason to do so, and it has to do with President Trump’s use of tariffs as tools in negotiating new trade deals for the United States—specifically, the suggestion that tariffs cause inflation.
On July 10th, President Donald Trump wrote a letter to Canadian Prime Minister Mark Carney, explaining the reasons why the United States was going to impose a 35% tariff on imports from Canada. Two days later, CNBC reported that the United States
will impose a 30% tariff on goods from the European Union and Mexico that will take effect on Aug. 1. … Trump said there will not be tariffs on goods from the EU if the 27-member bloc “or companies within the EU, decide to build or manufacture product[s] within the United States”
This is a milder tariff threat than the 50% tariffs that Trump had announced but delayed indefinitely in May. It remains to be seen if the 30% tariffs become reality; so far, Trump’s original announcements of tariffs have largely served their purpose of bringing foreign governments to the negotiating table.
Generally, Trump’s delays and changes to announced tariffs can be seen as gauges for how the trade negotiations are progressing. So far, they have not been implemented with the swiftness and broad impact that many suggested when Trump first announced new tariffs in the spring. However, despite the slower and more selective tariff roll-out, some analysts maintain that Trump’s new trade policy is to blame for an uptick in U.S. inflation in June.
Those critics are wrong. It is analytically impossible to link the small tariff increases that have already happened to the 2.67% inflation rate that the Bureau of Labor Statistics reported for the U.S. economy in June. A much more plausible explanation of this increase is the reversal in producer prices: after having deflated at increasing rates for much of 2024, the deflation reversed in the third quarter last year. Since then, producer prices have created an ‘input’ of inflation into consumer prices.
Generally speaking, it takes two months for rising producer prices to affect consumer prices. Therefore, the moderate rise in consumer-price inflation that we are now witnessing is much more likely to come from producer prices that increased long before Trump’s new tariffs went into effect.
In short, the tariff-to-inflation doomsday sayers have a steep hill to climb if they want to prove their case.
It is also worth noting that U.S. inflation is not trending upward. If there is any trend to the inflation figures, it is one that still points modestly downward, i.e., toward lower inflation rates. I doubt that we will get there—my prediction is that unless President Trump manages to fire Federal Reserve Chairman Jerome Powell any time soon, inflation will remain steady in the 2.5-3% range for the remainder of 2025.
Our inflation rate should actually be lower. If we examine our macroeconomic activity level, the current monetary policy, and other relevant factors, we should be at about 2% inflation. This is not happening; our current inflation is a combination of some demand-pull inflation due to a reasonably high activity level in the U.S. economy, and to some degree, large wage increases in the wake of the pandemic.
In short, the United States has a controllable level of inflation that will remain steady—for the time being. There is no discernible tariff effect on prices, at least not yet.
Europe is also experiencing a moderate rate of inflation, but in this case, the trend is upward. It is also entirely liberated from Trump’s tariff policy.
As of July 16th, 20 of the EU’s 27 member states have reported inflation rates for June, with the total inflation rate for the euro zone ticking up from 1.9% to 2.0%. Fifteen of the 20 states reporting had a higher inflation rate in June than in May, and 13 of them had a higher inflation rate in June than the average for the past 12 months.
The last point is significant, as it is indicative of a trend of rising inflation in Europe. Some troubling examples:
Austria, Greece, Luxembourg, and Slovenia also show worrisome upward trends in consumer price inflation. Other countries are on the same path, but with less force. A case in point is Croatia, the newest member of the euro zone. Their inflation rate in June was 4.4%; it was 4.3% in May and 4% on average over the past year.
Inflation figures for the euro zone as a whole do not reveal this upward trend. The currency area had an inflation rate of 2% in June, compared to a 2.2% 12-month average. However, their inflation index is heavily dominated by France and Germany, two economies where, currently, inflation is trending weakly downward. Therefore, a glance at the euro zone’s own inflation rate would not reveal the undercurrent of accelerating price increases across the continent.
Not only is inflation trending upward, but it is reaching levels that directly defy the European Central Bank’s recent interest rate cuts. So far into 2025, more EU member states have an inflation rate above 3% than last year.
This inflation trend should not be happening. There is no reason for Europe to experience the most common type of inflation, namely demand-pull inflation. It is caused by strong growth in economic activity, something that is rarely seen in Europe. In the first quarter of this year, inflation-adjusted GDP growth was 1.6% for the EU as a whole and 1.5% for the euro zone.
Only six of the 27 EU member states had a GDP growth rate above 3%—and one of them is Ireland, which is a strange macroeconomic outlier with extreme swings between growth and economic contraction. By contrast, 13 countries had a GDP growth of 1% or less, with many actually experiencing a decline in inflation-adjusted economic activity.
This means, bluntly, that Europe is likely experiencing a simmering, low-key version of monetary inflation. The ECB has made eight interest-rate cuts over the past two years; its deposit facility is now at 2%, down from 4% in September 2023. Its ‘refi rate’—an instrument for regulating liquidity levels in the financial system—is at 2.15%, down from a peak of 4.5%, while its marginal lending facility, used by ECB to provide overnight loans to commercial banks, has dropped from 4.75% to 2.4%.
Normally, a central bank can make rate cuts like these without any risk of monetary inflation. An economy that grows by at least 2.5% per year should be able to absorb the extra supply of liquidity that results from an expanding money supply. In less technical terms:
When, on the other hand, liquidity supply rises faster than demand, the excess money slushes around in the financial system. It becomes ‘cheap money’ that people can borrow frivolously and either spend or invest in real estate or other equity. This sets in motion a process of rising prices. The fact that we are seeing an uncharacteristic upward trend in consumer prices but relative calm in equity markets suggests that the harm done by ECB’s current monetary expansion policy is not yet significant.
That does not mean it will not become significant. The ECB is well advised to, at the very least, keep its interest rates steady from hereon.
