Possible Affects of the Tariff War on UK Inflation and Interest Rates

The latest tariffs that the United States has placed on Mexico, Canada, and China may have a bearing on UK inflation. Although the immediate effect on the UK might be small, the effects on world trade and economic stability could still be significant.
NIESR’s economists calculated that the tariffs would raise UK inflation by 3.4 percentage points in 2025. This would diminish the purchasing power of households and businesses, which in turn may result in higher prices for imported goods. The Bank of England may have to increase its interest rates, which will have an impact on economic growth and employment in turn.

This paper will first discuss how the recent tariffs imposed by the United States on Mexico, Canada, and China may affect UK inflation. Although the direct effect on the UK may be small, the overall effects on the global economy are likely to have an impact on the rates of inflation in the UK.

At NIESR, we use the New Keynesian Dynamic Global Model to estimate that the tariffs would increase UK inflation by 3.4 percentage points in 2025. This would erode the purchasing power of households and businesses and thus, if passed through to prices, lead to higher prices for imported goods. The Bank of England may have to increase its interest rates in response to the economic changes brought about by the tariffs, which in turn may push up mortgage rates.