ECB analysis finds U.S. tariffs blunt euro‑area inflation; rate cuts could undo pressure

European Central Bank economists quantify how recent U.S. tariffs have transmitted to the euro area and conclude the net effect has been disinflationary: the contraction in external demand outweighs any direct cost shock, feeding through to weaker domestic activity and lower consumer-price pressures. Their structural model points to the largest impact on prices occurring roughly one to two years after a tariff shock, with empirical trade data showing a pronounced fall in exports to the United States that aligns with the modelling. The paper stresses marked heterogeneity across sectors: industries most exposed to the U.S. measures — notably machinery, autos and chemicals — also display above-average responsiveness to changes in borrowing costs, implying conventional monetary easing can deliver a relatively rapid rebound in output and prices in those areas. At the same time, the researchers acknowledge several mitigating forces that have limited near‑term pass‑through: negotiated exemptions and caps, front‑loaded imports ahead of levies, inventory build‑ups, rerouted sourcing, and firms absorbing margins to protect market share. Those private and political adjustments help explain why aggregate growth has shown resilience despite measurable trade frictions. However, the paper warns these buffers are not permanent: as inventory cushions unwind, exemptions are reassessed, or firms shift costs onto prices, pass‑through could intensify and re‑ignite inflationary pressures or compress corporate margins. The authors also flag statistical distortions from front‑loading that complicate real‑time interpretation of trade volumes. From a policy perspective, the finding creates a dilemma for the ECB: external trade policy is currently suppressing inflation while headline rates sit below target, yet the same sectors transmitting the shock are those most amenable to conventional monetary easing — meaning rate cuts would likely offset much of the tariff‑driven disinflation. The paper therefore frames tariff developments as a material input to the ECB’s policy calculus, while noting that offsetting with looser policy carries trade‑offs for financial stability, firm profitability and international diplomatic objectives. In sum, U.S. tariffs have acted as a meaningful temporary drag on euro‑area demand and prices, but both public negotiations and private sector adjustments have moderated the immediate impact — leaving an uncertain path once those buffers fade.