Are Trade Wars Deflationary Or Inflationary: Here Is The Answer

When it comes to trade wars, such as the tit-for-tat escalation currently being waged between the Trump administration and the rest of the world, one burning question that investors have to answer is whether the outcome of such a trade feud will be inflationary - in the form of rising consumer costs as import prices rise as corporations pass on tariffs costs to end buyers - or deflationary - as the impact of escalating tariffs eventually results in a broader economic slowdown: the answer will determine not only capital allocation and monetary policy decisions but would have sweeping economic consequences across the globe. 

Now, thanks to an analysis by SocGen, we have an answer: it depends, or rather "Inflationary short term, disinflationary medium term."

To approach the problem, SocGen parsed the newsflow for keywords that are associated with inflation and linked with “trade war”-related keywords, and repeat the same exercise for disinflation/deflation.

Since March 2018, the French bank observed that the “trade war” newsflow linked to inflationary and disinflationary scenarios has been growing. This highlights the nuanced impact of the trade wars, which SocGen "expects to be inflationary in the short term, and disinflationary in the medium term."

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And while there is a temporal aspect, as of late SocGen has found that the deflationary impact of the trade war has been dominating. Here's why:

The escalating tariffs war between the US and the rest of the world is disrupting global supply chains and increasing the cost of imported goods in the short term. However, it could also spell the end of the reflation story that has supported the markets since February 2016. In fact, the global growth re-synchronisation story, driven by the recovery of Europe in 2017, has already been delayed.

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One place where the immediate adverse, and thus deflationary,

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