An analysis suggests that President Donald Trump's proposed tariffs could lead to higher wages due to increased inflation expectations. According to Deutsche Bank's scenario, wages could potentially rise by 4.5% annually, exceeding the 3% norm before the pandemic. This alignment of increased wages and inflation concerns could pose a challenge for the Federal Reserve officials who fear a return to 1970s-style inflationary cycles driven by "wage-price spirals."

Tariffs may result in increased costs for various goods and services, including the value of labor per hour, as indicated by economists at Deutsche Bank. While tariffs typically raise prices and have negative effects on economies, recent tariff announcements by Trump have triggered market fluctuations. Nonetheless, despite the potential economic drawbacks, higher consumer prices from tariffs may also bring the benefit of higher wages for individuals.

Examining the impact of the tariff campaign alongside recent Federal Reserve Bank of San Francisco research on inflation expectations, Deutsche Bank economists found a correlation between consumer expectations of inflation and subsequent wage increases. With consumers increasingly anticipating higher inflation due to tariff threats, they are asking for and receiving higher wages. The analysts predict that the latest tariffs could drive annual wage growth up to 4.5%, well above the pre-pandemic level of approximately 3%.

This situation could have implications for the Federal Reserve, tasked with maintaining low inflation and high employment through monetary policy. The Fed closely monitors tariff developments to gauge the potential inflationary effects of rising consumer prices. In response to such economic scenarios resulting from tariffs, the Federal Reserve may need to adjust interest rates to prevent wage and price increases from creating a self-sustaining inflationary cycle akin to the 1970s economy during the post-pandemic recovery.