Disinflation Signals Emerge from Trump’s Tariff War, Opening the Door for a Crypto Comeback

Despite initial fears of an inflation spike, financial markets are now signaling a disinflationary shift in the wake of President Donald Trump’s aggressive trade policies—potentially setting the stage for a rebound in bitcoin (BTC) and other risk assets.

Trump’s first move after his January inauguration was to slap heavy tariffs on China, Canada, and Mexico, fulfilling his campaign promise to “tariff and tax foreign countries to enrich our citizens.” Since February 1, the U.S. and China have exchanged tit-for-tat tariffs exceeding 100%, sparking renewed trade war concerns.

Conventional wisdom suggests tariffs fuel inflation by raising consumer prices. That narrative gained traction in early February as the Federal Reserve warned of a stagflation scenario—combining slow growth, high inflation, and rising unemployment. Risk markets recoiled, with bitcoin tumbling nearly 20% alongside broader selloffs in stocks, bonds, and the dollar.

But Bond Markets Tell a Different Story

Key inflation metrics are contradicting that view. Breakeven inflation rates—derived from Treasury and TIPS yields—have dropped notably. The five-year breakeven rate has declined from 2.6% to 2.32%, while the 10-year is down from 2.5% to 2.19%, according to Federal Reserve data. The Cleveland Fed’s two-year inflation forecast remains steady at 2.6%.

Analysts say the disinflationary trend could reflect a familiar dynamic: consumers facing higher prices without higher incomes tend to cut back spending. This drop in demand can trigger deflationary pressures over time.

“Tariffs aren’t inflationary—they’re deflationary and even stimulative,” said veteran market strategist Jim Paulsen on X. “This disinflation gives the Fed room to ease. Relief is coming.”

Historical Context Backs the View

Economist Ravi Batra noted in 2001 that high tariffs in U.S. history have often been followed by falling living costs, not inflation. He argued that inflation linked to tariffs tends to occur in underdeveloped or centrally controlled economies—not in advanced, market-driven ones like the United States.

A Turning Point for Crypto?

The initial market reaction may have been driven more by fear of slowing growth than inflation. As disinflationary data builds and the Fed potentially pivots dovish, sentiment toward high-beta assets like bitcoin could shift.

If rate cuts come into play, crypto markets may find themselves with a fresh tailwind—reversing the recent downtrend and reigniting risk appetite.