Investing.com - Markets seem to be pricing in a short-term jump in inflationary pressures due to President Donald Trump’s tariff plans, but long-term price growth forecasts remain intact, according to analysts at UBS.
In a note to clients, the analysts led by Julien Conzano flagged that concerns are rising that Trump’s call for aggressive levies on both friends and adversaries alike could drive up prices in the near term.
Meanwhile, the uptick in inflation is tipped to contribute to a slowdown in growth in the U.S. to 2.0% this year, cooling from 2.3% in 2024, the analysts predicted.
But they noted that this would not translate into a "material drop" in economic activity or a recession. Some economists have warned that a tariff-fueled surge in inflation could eventually drag the American economy into a downturn, although it remains unclear if recent data is signaling such a trend.
"[T]here are probably as many indicators showing an incoming recession as metrics suggesting the economy is doing just fine," the UBS analysts wrote.
Instead, markets are now trying to gauge if the economy is heading towards so-called "slowflation," when growth is lower but still positive and inflation remains historically elevated, they added. The analysts noted that U.S. investment-grade credit spreads among the insurance and energy sectors are the "most priced in" for this type of economic period, along with transportation and telecoms in high-yield credit spreads.
"At a sector level, we remain long [high-yield] telecom and short [high-yield] food and beverages, in line with elevated/little slowflation pricing suggested by our framework," the analysts said.
The comments come after the Federal Reserve left interest rates unchanged last week, but raised its inflation outlook and lowered its projections for growth. Still, Fed Chair Jerome Powell described the U.S. economy as "strong overall" despite some moderation in consumer spending.