Over the past year, a growing number of market observers and economic analysts have pointed to a significant divergence between headline inflation figures and real-time pricing conditions. Despite official data suggesting that inflation remains persistently high, underlying indicators have increasingly shown signs of cooling. At the heart of this discrepancy lies a critical structural feature of the Consumer Price Index (CPI): the shelter component, which includes measures like rent and homeowners’ equivalent rent, is notoriously slow to adjust to market conditions.
The implication is significant: if CPI converges downward toward real-time data, the Federal Reserve would have clear justification to cut interest rates. This, in theory, would cool the pressure on capital markets, reduce the burden on borrowers, and create more breathing room for businesses and consumers alike. But this narrative, though analytically sound, has a missing piece—tariffs.
Tariffs as The Quiet Catalyst
Over the last few years, tariff activity—especially originating from U.S. trade policy—has re-emerged as a silent inflationary force. New rounds of tariffs on steel, aluminum, autos, and a range of consumer goods have not only raised direct costs but subtly reshaped the pricing power dynamics of global supply chains.
The first-order effect is straightforward: prices rise. Importers pass costs onto consumers. Domestic producers, protected from international competitors, also raise prices—either because they can or because they must in order to cover rising input costs. The inflation that results is not always reflected in CPI immediately, but it is real for households and businesses, especially those operating on thin margins.
In competitive sectors like retail, hospitality, or fast-moving consumer goods, many businesses lack the leverage to pass costs forward. They absorb them. Margins shrink. Investment slows. Workers may not get raises, and layoffs quietly ripple through the system.
This cascading effect distorts consumer behaviour. Households, faced with rising costs for essential goods, reduce discretionary spending. Services—dining out, entertainment, wellness—feel the squeeze. The economic impact isn’t just a number on a government report; it’s a shift in how people live.
The Second and Third-Order Effects
Retaliation from trading partners is inevitable. No country wants to appear weak or expose its industries to foreign manipulation. Retaliatory tariffs punish exporters—farmers, automakers, machinery manufacturers. This harms local economies, especially in rural or industrial areas.
But beyond retaliation lies something murkier: a third-order realm of long-term structural erosion. The productivity growth that comes from global competition—learning from rivals, pushing for efficiency—slows. Innovation stalls when firms become complacent behind tariff walls. Consumers lose not just purchasing power, but choice.
The world spent four decades becoming more integrated, and this globalisation played a major role in keeping inflation tame, especially for goods. Singapore’s economy, deeply dependent on trade and external demand, is a case in point. Our ability to import components, source from global supply chains, and tap into international consumer bases has allowed us to offer high-quality goods at competitive prices, despite limited domestic resources.
If tariffs become more widespread, Singapore, like many other trade-dependent economies, will feel the pinch. Costs of imported materials will rise, logistics will get messier, and the efficiency of production will suffer. Local exporters may face higher tariffs abroad, even if we are not directly involved in the origin of the disputes. Small and medium enterprises (SMEs), already grappling with labour shortages and high rents, will find it even harder to stay competitive.
In a city-state with no hinterland, limited land, and a small domestic market, we cannot afford to look inward. Tariffs globally may not be Singapore’s doing, but their consequences do not respect national borders.
Reshoring Sounds Patriotic—But Is It Practical?
One argument used to justify tariffs is that they will encourage domestic manufacturing. In theory, reshoring jobs and production sounds like a win for national self-reliance. But in practice, it’s painfully slow and expensive. Building factories, retraining workers, creating new supplier networks—these take years, if not decades.
For consumers, the transition means higher prices—possibly for a very long time. For businesses, it’s uncertainty. Some may gamble and invest locally, others may hold back until clearer signals emerge. For investors, it’s volatility. And for central banks? A policy headache: do you raise rates to fight tariff-driven inflation, or cut them to support an economy weakened by trade disruptions?
A Singaporean Perspective: What Can We Do?
Singapore has always positioned itself as a nimble, neutral, and forward-looking hub. In a world of rising protectionism, we must double down on this identity. Strengthening trade ties beyond the major powers—through ASEAN, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the Regional Comprehensive Economic Partnership (RCEP)—is one path. Investing in logistics, digital trade, and innovation ecosystems is another.
Equally important is educating consumers and businesses about the true nature of inflation and global interdependence. When prices rise, the instinct is to look for scapegoats: foreign workers, government policies, large companies. But sometimes, the root lies thousands of kilometres away in a trade policy meeting in Washington or Beijing.
Singapore’s resilience has always come from foresight and flexibility. We cannot control the world, but we can adapt faster than most.
For Investors: How Should We Invest
The U.S. stock market is entering a cautiously optimistic phase. With real-time inflation already cooling and the lagging CPI data beginning to catch up, investors are expecting the Federal Reserve to begin cutting interest rates later this year. If this plays out as anticipated, we could see a broad relief rally—especially in sectors like technology, real estate, and consumer discretionary. These areas have been under pressure during the rate hike cycle and would likely benefit first from any easing of monetary policy.
However, the picture is far from clear-cut. Trade tensions, particularly the threat of renewed tariffs on goods from China, Mexico, and other major trading partners, could disrupt the outlook. If protectionist policies return in full force, companies with global supply chains will face margin pressure, and consumer prices may rise again. This would complicate the inflation story and possibly delay rate cuts, which could inject fresh volatility into the market. Investors are likely to remain reactive to political headlines.
In Singapore, the market remains more stable but externally vulnerable. The city-state’s economy is deeply integrated with global trade, and any slowdown in global demand—especially from the U.S. or China—would affect exports, manufacturing, and port activity. At the same time, Singapore’s financial sector remains strong, and local interest rate stability could support steady returns for investors, particularly in banks and REITs. The real estate market, though cautious, is still holding up, which bodes well for property-related stocks.
If the global economy avoids a hard landing and inflation continues to moderate, Singapore equities could perform reasonably well. But if a major trade war erupts, the first to feel the pinch will be Asia’s export hubs—and Singapore is right at the center of that map. This is a market that thrives on open borders and cross-border flows, and any significant disruption to those flows could dampen earnings across several sectors.
For investors, both the U.S. and Singapore markets offer opportunities—but they must be navigated with an eye on inflation data, interest rate signals, and the unpredictable politics of trade. The coming months may reward those who stay flexible and defensive while keeping a long-term view.
Should You Care About Tariffs as a Retail Investor
As a retail investor, it’s easy to get caught up in the constant flow of political news, such as tariffs or policies from figures like Donald Trump. However, these factors may not have a significant or lasting impact on your long-term investment strategy. Investing is primarily about the long-term, and while short-term volatility might arise due to political events, these fluctuations often smooth out over time. What truly drives long-term returns are the underlying economic fundamentals, including company earnings, growth potential, and broader market trends, rather than the actions of a single political figure or government policy.
The market has shown time and again that it is resilient, recovering from political shifts, trade disputes, and policy changes. While these events can create noise, they don’t necessarily affect the market in the long run. As a retail investor, your focus should be on maintaining a diversified portfolio that can weather political changes rather than reacting to each new development. Diversification across sectors and regions helps reduce the impact of any one country’s policies or political shifts, making your investments less vulnerable to the whims of political leaders.
Additionally, the impact of political policies is often uncertain. Decisions like tariffs may initially cause disruptions in certain industries, but their long-term effects may be less severe than anticipated, or markets may quickly adapt by discovering new opportunities. This uncertainty makes it even more important to avoid emotional reactions to headlines. Making investment decisions based on fear or hype can lead to impulsive moves, which may not align with your overall financial goals.
While staying informed about the political landscape is important, retail investors should resist the temptation to let short-term political events dictate their investment decisions. Instead, focusing on the long-term fundamentals and maintaining a diversified, disciplined approach to investing will better serve your financial objectives.
Inflation, tariffs, reshoring—these aren’t isolated issues. They’re threads in a much larger tapestry. When we only look at CPI or base rates, we miss the texture underneath. The world economy is not a machine with a few buttons; it’s an organism with complex feedback loops.
In the end, perhaps the most dangerous idea is the belief that we can reverse globalisation without consequences. That somehow, prices can stay low, jobs can return home, and growth can remain strong—all at once.
It’s tempting. It sells. But it’s probably wrong.
Disclaimer
Every effort has been made to ensure the accuracy of the information provided, but no liability will be accepted for any loss or inconvenience caused by errors or omissions. The information and opinions presented are offered in good faith and based on sources considered reliable; however, no guarantees are made regarding their accuracy, completeness, or correctness. The author and publisher bear no responsibility for any losses or expenses arising from investment decisions made by the reader.
