One difference between the current trade conflict and the dispute of 2018-20 is that the dollar has significantly declined in value.
In the current dispute, investors are increasingly questioning the sustainability of the American fiscal path and the wisdom of the assault in the independence of the Federal Reserve.
Once the dollar begins to depreciate, higher inflation typically follows as imported goods become more expensive, but it usually takes nine to 12 months for the higher prices to take effect.
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Should the dollar hold near current levels or decline further, then one should anticipate a possible 0.5% increase in inflation this year because of dollar weakness.
Such a scenario will most likely lead the Federal Reserve to hold its policy rate steady through the end of the year at best as it attempts to ascertain the direction of inflation because of tariffs, a weak dollar and expansionary fiscal policy.
