The impact of energy prices
Ramsey doesn’t provide a source for his estimate, but according to the U.S. Energy Information Administration, the national energy expenditures increased in 2022, accounting for 6.7% of nominal gross domestic product (GDP) compared with 5.6% in 2021.
However, since energy is a major input in manufacturing and production, a spike in energy costs has knock-on effects on the price of everything else. In March 2022, Federal Reserve Chair Jerome Powell said he applied a general rule of thumb that every $10-per-barrel increase in the price of crude oil raises inflation by 0.2% and sets back economic growth 0.1%.
Consequently, a reduction in energy costs should reduce inflation as well. However, the trade war proposed by the Trump administration could have the opposite effect.
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Learn MoreThe impact of tariffs on energy
Although the U.S. has been a net total energy exporter since 2019, it imports some types of energy, including natural gas and crude oil from other countries, including Canada.
According to the Canadian government, in 2023, Canada provided 100% of America’s imported natural gas, 60% of its imported crude oil and 85% of its imported electricity.
Which is why the Trump administration’s proposed 25% tariff on Canadian imports could raise the cost of this imported energy. In fact, the trade war could impact all inputs, not just energy.
Tariffs on steel, aluminium, lumber and food imports would impact not only the fuel for the truck carrying bread to your grocery store, but also the cost of the truck, the shelf on which the bread sits and the wheat that’s used to manufacture the bread itself.
If implemented as proposed, tariffs on Canada, Mexico and China alone would add $1,200 to the typical American family’s annual expenses, according to the Peterson Institute for International Economics. This doesn’t include any other costs from tariffs on other countries or retaliatory tariffs.
In a recent speech, Federal Reserve Bank of Chicago President Austan Goolsbee also raised the concern that tariffs could reignite inflation in the near-term. Even if the tariffs are not implemented and inflation subsides, investors and consumers should prepare for the worst-case scenario.
Protecting your budget and portfolio
Investors and consumers worried about stubborn inflation could take a closer look at safe havens like gold. The price of a single ounce of the yellow metal recently hit $2,900. SPDR Gold Shares ETF (GLD) is a convenient option for those looking to add exposure to this asset.
Another safe haven is Treasury Inflation Protected Securities (TIPS). According to the U.S. Treasury Department, the par value of these treasuries are adjusted according to inflation on a regular basis, which means investors can use them to protect purchasing power over the long-term.
Meanwhile, consumers can potentially protect their budget by pulling forward some essential purchases and cancelling non-essential ones.
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