The confidence in inflation that the Federal Reserve had last year has dramatically changed to caution this year. Is US President Donald Trump's trade war truly going to change the game when it comes to inflation? They certainly aren't helping.

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It's been a tough start to 2025, with financial markets in chaos on Trump 2.0 policies. Since Trump took over as the US president, his executive orders have ignited jitters across global assets.

Trade war jitters and inflation in spotlight

Trump's tariff threats have complicated the Federal Reserve's rate-cut cycle. Just a few months ago, the fed enjoyed a rare moment of confidence. Inflation was becoming more predictable, giving officials the much-needed courage to start cutting rates. That confidence has, unsurprisingly, diminished.

Stickier inflation numbers and tariff threats have prematurely put the brakes on the Fed's ambitions to get interest rates back to neutral. But for all the hype, are tariffs really a big deal for inflation?

A new report from the Boston Fed concludes that tariffs would have added less than a percentage point to core inflation. That is not big in the scheme of things.

But as the fed paper makes clear, it really comes down to how firms respond. Small changes to retail margins can make a surprisingly big difference. Are firms still well-positioned to pass on the full costs of higher tariffs?

Consumer spending still looks decent, and presumably, this week's retail sales figures should show a boost as shoppers have front-run tariffs. Away from tariffs, any good US inflation news will boost investor sentiment. Rents have been a major driver of core inflation for a long time now.

However, rents have been falling. None of this is to say inflation won't remain elevated this year. Still, it's far from clear how inflationary the president's plans on tariffs and migration will end up.

US Inflation will make early headlines this week, with the risk of higher prints for both headline and core measures. Food prices - egg prices in particular - and energy costs have been rising while vehicle prices are grinding higher and housing costs remain sticky.

Inflation is likely to remain elevated, and the Fed is unlikely to cut rates before June. Over in Europe, policymakers face a different challenge: higher natural gas prices.

Headline inflation is creeping higher, and European surveys on selling prices have started to rise again. Still, none of this seems to faze the European Central Bank, unlike the Fed.

But listening to the Bank of England last week, it's clear that the ghosts of the 2022 gas price shock are still haunting officials. Still, trump's ability to surprise markets with new announcements on a multitude of topics will continue to keep participants on edge this week too.

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(With the inputs from the agencies)