Page 37 - CII ARTHA

OCTOBER 2025

The impact of high tariffs on inflation is more uneven across
economies, as per an August 2025 bulletin of the Bank for
International Settlements , with the US likely to witness
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significant inflationary pressures as a direct result of higher
costs of imports. US neighbours - Canada and Mexico - are
the other economies that are estimated to see rising inflation,
especially if the respective governments impose retaliatory
tariffs. Whereas, the magnitude of upward price movement is
likely to be less severe for China and Euro Area, given their
large economic size, market power, and export diversity.
Overall, inflation movement and magnitude will likely depend
on a mix of factors including pass-through of high tariffs to
consumers, business agility in diversifying sources of supply,
and exchange rate movements.

Monetary Easing – Varied
Approaches, but Shared Concerns

Around Growth, Inflation and
Employment

While the Covid-19 pandemic brought the global economy to a
temporary halt, it was followed by a period of historically high
price levels across economies spurred by a spike in pent-up
demand during return to normalcy. Expectedly, central banks
around the world used monetary policy as one of key levers to
tame inflation as growth started rebounding. But the approach
varied across countries, taking into consideration prevailing
domestic conditions at the time.

Headline Inflation (y-o-y%)

Country 2018 2019 2020 2021 2022 2023 2024 2025 (P) 2026 (P)
US 2.4 1.8 1.3 4.7 8.0 4.1 3.0 2.7 2.4
China 2.1 2.9 2.5 0.9 2.0 0.2 0.2 0 0.7
Japan 1.0 0.5 0 -0.2 2.5 3.3 2.7 3.3 2.1
UK 2.5 1.8 0.9 2.6 9.1 7.3 2.5 3.4 2.5
Canada 2.3 1.9 0.7 3.4 6.8 3.9 2.4 2.0 2.0
Euro Area 1.8 1.2 0.3 2.6 8.4 5.4 2.4 2.1 1.9
Source: IMF WEO October 2025 update

Since 2024, monetary policy across countries has witnessed a coming in October 2025, bringing it to 4.0 per cent. The latest
shift towards the accommodative stance, as previous rate cut coming right after the September 2025 cut of 25 basis
hikes have been successful in containing demand and points, indicates that supporting growth and employment
bringing down inflation. Further, the need to support recovery generation continues to be the central bank's primary concern,
amid new challenges of trade friction and muted growth even as inflation remains above the target of 2.0 per cent.
outlook has taken precedence. A country wise analysis sheds However, the Fed will continue to keep a close watch on
light on the various pathways to monetary easing, reflecting evolving growth and inflation dynamics, as it decides on policy
nuanced approaches and individual policy concerns. rate in the upcoming review in December.

The US Federal Reserve (Fed) first cut the federal funds rate In contrast to other major economies, China didn’t respond to
in September 2024 by 50 basis points from the high of 5.5 per post-pandemic inflation rise with rate increases, as concerns
cent maintained since July 2023. Thereafter, the Fed has regarding persistent disinflationary pressures and muted
gradually brought down the rate, with the most recent cut growth in the aftermath of the 2018 trade war with the US
outweighed temporary spike in inflation.
4 Macroeconomic impact of tariffs and policy uncertainty - Emanuel Kohlscheen, Phurichai Rungcharoenkitkul, Dora Xia and Fabrizio Zampolli, 12 August 2025
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