Tariff Tensions and Labour Market Strains: Pressures Mount on Policy Makers

Tariff Pass-Through Intensifies Globally

The Trump Administration has implemented one of the most aggressive tariff regimes in over a century, with broad economic and diplomatic repercussions beginning to surface. Countries such as India have started boycotting American goods, and similar sentiment is emerging in Canada. Estimates suggest Canadian actions alone could subtract 0.3% from U.S. Gross Domestic Product (GDP). Goldman Sachs estimates that the tariff burden breaks down as follows:

64% borne by U.S. companies

22% by U.S. consumers

14% by foreign exporters lowering prices

Beyond inflationary effects, tariffs may act as a persistent drag on economic growth; reducing business margins, household spending power, and international demand.

U.S. Inflation and Labour Market Softness

While U.S. CPI (Consumer Price Index) held steady at 2.7% in July, PPI (Produce Price Index) accelerated to 3.3% year-over-year, with notable price increases in investment-related services, linked to equity market strength. The Federal Reserve’s (Fed) preferred metric, core PCE (Personal Consumption Expenditure), stood at 2.8% in June.

Importantly, recent inflation stems from one-time tariff-induced price hikes. The longer-term impact is more structural, permanently reducing consumer spending, if households shoulder the cost, or business profitability, should firms absorb it.

Labour data paints a weakening picture:

July nonfarm payrolls came in at just 73,000

Downward revisions for the prior two months totalled 258,000

Unemployment ticked up to 4.2%; adjusted for migrant departures, it could be closer to 4.9%

Labour force participation fell to 62.2%

Deportations and voluntary migrant exits are shrinking the labour pool and suppressing household consumption.

Trump’s recent dismissal of the Bureau of Labour Statistics (BLS) head further underscores the Administration’s focus on shaping the narrative.

Fed Under Pressure Ahead of September Meeting

Chair Powell faces increasing internal dissent as the Federal Open Market Committee (FOMC) approaches its September 16–17 meeting. A weaker August jobs report could provide cover for a 25 basis point rate cut.

Following the resignation of Fed Governor Adriana Kugler, Trump appointed Stephen Miran, further tilting the FOMC toward dovishness. With three potential dissenters in play, Powell’s position appears increasingly fragile. Media commentary from unofficial Fed candidates is also being leveraged to justify additional rate cuts.

No major developments are expected from Jackson Hole on August 22.

Canada: Growth Fragile, Rate Cuts Likely

Canada continues to face significant economic headwinds. Business investment is stagnant, and unemployment is expected to rise beyond the current 6.9%, with only 500,000 job openings nationally.

Households are under pressure:

Cautious spending

Falling home prices

Roughly 60% of mortgages are up for renewal within 12 months, likely at double the previous rates

Meanwhile, inflation remains subdued. July CPI came in at 1.7%, below the midpoint of the Bank of Canada’s 1%–3% target range. This creates room for additional policy easing at the next meeting on Wednesday, September 17.

Outlook and Implications

Markets may be underestimating the delayed but significant effects of tariffs. The early impact was softened by inventory frontloading and delayed pass-through from long shipping times. But as the policy takes hold, inflation may rise modestly while growth slows meaningfully.

The U.S. economy is now facing dual headwinds: a shrinking labour force and tariff-related consumption drag. Meanwhile, Canada’s more vulnerable trade-dependent economy is likely to see weaker growth and falling rates.

Expect a continued decline in Canadian yields, with attractive capital gain opportunities at the long end of the curve.

The commentaries contained herein are provided as a general source of information based on information available as of August 21, 2025 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication however, accuracy cannot be guaranteed. Market conditions may change and Caldwell Investment Management Ltd. accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained herein. Investors are expected to obtain professional investment advice.

Published on August 25, 2025