Investors are ignoring the coming wave of tariff-driven inflation, Deutsche Bank warns

Jim Edwards is the executive editor for global news at Fortune. He was previously the editor-in-chief of Business Insider's news division and the founding editor of Business Insider UK. His investigative journalism has changed the law in two U.S. federal districts and two states. The U.S. Supreme Court cited his work on the death penalty in the concurrence to Baze v. Rees, the ruling on whether lethal injection is cruel or unusual. He also won the Neal award for an investigation of bribes and kickbacks on Madison Avenue.

One of the central mysteries inside President Trump’s tariff plan is, where is the inflation? 

Once all the new levies are in place—the latest is that all imports into the U.S. from India will be subject to a 50% tariff starting today—the effective average tariff rate will be somewhere near 15%. Estimates vary. Pantheon Macroeconomics puts it as high as 19%. Prior to Trump, it was 2.4%. 

And yet inflation is currently running at only 2.7%. Although it is heading upward, its momentum isn’t great. Inflation is conspicuous

Wall Street analysts have been puzzling over this for a while. Surely, if the government imposes a price increase on a wide range of goods, inflation must follow?

Deutsche Bank’s Henry Allen published a research note yesterday arguing that it is following, and that the market is underestimating its effect. He points to the correlation between the prices paid variable in the ISM services indicator. The survey is a relatively narrow one, and it measures what service-economy companies are paying for goods. But the weird thing about it is that the indicator moves in close correlation to the Consumer Price Index, except that the CPI lags ISM services

“That prices paid component moved up to 69.9 in July, the highest since October 2022, back when CPI was still above 7% and the Fed were hiking

Consumers also think higher inflation is coming. The Conference Board’s most recent inflation expectations consumer survey, which asks people to estimate where they think inflation will be 12 months from now, rose 0.5 percentage points to 6.2%.

In a note seen

Deutsche Bank’s Allen argues that investors seem to be ignoring this data. He points to the inflation swaps market, where investors bet on future inflation rates. “Inflation swaps aren’t pricing this at all,” he says, noting that the 1-year swap hasn’t moved much since early April, when Trump launched his trade war.

“This is particularly striking when you consider that we know the tariff impact is still filtering through. First, because it takes time for tariffs to be passed into consumer prices. Second, even the data we do have only goes up to July, and several more tariffs were imposed after that in August, like 50% on copper and an increase to 35% on Canada. Third, the administration has said more tariffs are still to come, with reviews into semiconductors, pharmaceuticals and critical minerals. So it’s surprising that inflation swaps aren’t pricing in more inflation risk,” he wrote.

Here’s a snapshot of the markets prior to the opening bell in New York: