Investors are using U.S. inflation swaps to protect themselves from potential price increases due to President Trump's tariffs. These swaps involve two parties: the receiver, who wants to shield against inflation, and the payer, often a bank, taking on the inflation risk. The receiver agrees to swap a fixed amount with the payer for floating payments linked to the Consumer Price Index. These swaps, totaling $1.3 trillion this year, are also utilized to speculate on inflation trends and expectations.

Markets have seen a surge in inflation swaps since Trump's inauguration, amid tariff uncertainties. With Trump set to announce reciprocal tariffs, concerns about a recession have escalated. This uncertainty has driven one-year U.S. inflation swaps to their highest level in two years, indicating expectations of a 3% CPI average over the next year. On the other hand, longer-term swaps suggest a decrease in inflation after an initial spike caused by tariffs.

Analysts predict tariffs on goods like cars, semiconductors, lumber, and pharmaceuticals but mention the possibility of negotiation to avoid U.S. tariffs. While an initial inflation increase is expected due to firms raising prices to offset tariffs, medium-term projections foresee a decrease in inflation and economic activity, reflecting fears of a recession.