Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 24
THE DRUMMER'S EAR | RHYTHMIC REASONING
uncertainty into global commerce. The burden of these pressures
falls unevenly across stakeholders, with firms facing thinner
margins and consumers absorbing higher prices.
Fig. 4: Inflation expectations in the U.S. are
materially higher than in other countries
8%
6%
A first response to rising costs associated with tariffs and other
factors could be to push for greater efficiency gains by investing in
automation, thereby raising productivity and reducing headcount,
though the path forward is unclear.
Year-ahead inflation expectations.
4%
REPUBLICANS FACE AN UPHILL TASK TO RETAIN HOUSE
MAJORITY IN 2026 MIDTERMS
2%
History has shown that, on average, the President’s party loses
seats in both legislative branches in the midterms, and with
President Trump’s job approval ratings on the decline, the bar for
the Republicans to maintain the status quo or even improving their
standing in both chambers appears high (Fig. 6).
0%
2023
2024
U.S.
Eurozone
2025
U.K.
Inflation target
Source: Bloomberg Finance LP, Scotia Wealth Management
The ultimate effect that tariffs will have on inflation is anyone’s
guess, but we are seeing broadening price pressures in the U.S. with
core CPI accelerating for the third month in a row in August to 4.2%
on a month-over-month annualized basis. Core services inflation
(i.e., ex-shelter and energy services) remained at 0.3% month-overmonth (or 4% month-over-month in annualized terms) after the
prior 0.5% jump. This should be of greater concern to the Fed
if it is inclined to look through tariff effects. Core service prices
are more closely influenced by domestic economic considerations
and are exhibiting significant stickiness. Core goods – a key source
of disinflation over the past year or so, but also the category
most prone to tariff-related effects – have also started to move
higher (Fig. 5). Still, the overall effect of tariffs on overall inflation is
relatively muted, suggesting that companies have so far not passed
the cost on to the end user (though this is not to say that this won’t
eventually be the case).
All
Dem
-3
GOP
-3
-4
-23
-26
-33
House turnover
Senate turnover
Source: The American Presidency Project, Scotia Wealth Management
Based on the electoral map, we think Democrats have an uphill
battle for the Senate. To flip the chamber, they will need to net four
seats, a tall task considering that the majority of seats up for grabs
are in states that Donald Trump won.
Fig. 5: Inflation remains persistent, but not
necessarily due to tariff-related price increases
12%
MoM % chg (annualized)
Fig. 6: Average seat turnover in U.S. midterm elections since 1934
The House a different story. Republicans are clinging to a slim
majority, and the nature of the elections – wherein every House
representative must go to the polls every two years – indicate that
the GOP has its work cut out. If the Democrats succeed in obtaining
a House majority, it would likely halt President Trump’s legislative
ambitions.
8%
4%
0%
-4%
2022
2023
2024
Headline CPI
Core CPI
Core services ex. housing & energy
Core goods
2025
2% target
Source: Statistics Canada, Bloomberg Finance LP, Scotia Wealth Management
Tariffs are part of a broader pattern of supply chain disruptions
and border frictions that have flared repeatedly since 2016, from
Brexit and the first Trump trade war to the pandemic, the Ukraine
conflict, and the Red Sea shipping disruptions. Together, these
shocks have kept trade costs elevated and injected persistent
Of course, a lot can change between now and when voters go
to the polls. Republicans are banking on tax breaks from the
budget bill to turn the tide in their favour, offsetting the opposition
to Medicaid cuts that the Democrats will likely campaign on.
Economic conditions could also improve materially, potential
interest rate reductions could spur borrowing and investment, and
the inflationary effects of tariffs could end up being subdued.
While not impossible, the odds of the Republicans shifting public
sentiment enough to retain control of the house seems low, in our
view.
24 of 62
