Under Surveillance

US core inflation rose above expectations in January. Some residual seasonality may be at play, but the US has been experiencing a rebound in underlying price pressure since the end of last summer. Consumers are noticing: the upward shift in households’ inflation expectations in the University of Michigan survey is striking. Political inclinations play a major role in how US consumers perceive the economy, but we find it interesting that confidence today is lower than at the beginning of D. Trump’s first term even among Republicans. This would indicate that, even if political polls remain favourable to the President, the new administration is already “under surveillance”. While this should call for more prudence on tariffs, the White House seems to be doubling down, with this notion of “reciprocal tariffs”. We note however that the Department of Commerce has 6 months to evaluate such policy. This provides some space for de-escalation, even if uncertainty alone is probably already weighing on firms’ decisions.

We take stock of the additional threats to globalization. The “clubification” of the world economy across clusters of countries sharing similar values or security concerns, with a few “connectors” linking those clubs, looked like a degraded but still workable version of the “world economic order”. Yet, even these clubs are now proving unstable and connector countries may suffer from stricter rules of origin. It is however possible that a hybrid model emerges, with a loose alliance of countries still complying with the old multilateral rules co-existing with the rival blocks.

Blanchard and Pisani-Ferry call on the EU to take the lead of this alliance. Yet, the EU must first prove its internal solidity. The elections in Germany on 23 February will be a key test. The outcome remains uncertain, and we provide some illustrative scenarios. We remain doubtful that Berlin will be willing to take the EU to a deeper state of integration after the elections, while coalition negotiations will likely generate a transitory political vacuum at a time when Europe is for now excluded from peace talks on Ukraine which can have serious ramifications for its future.