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Since taking office, President Trump has aggressively worked to revitalize domestic manufacturing by focusing on the U.S. trade balance. A key part of this strategy has been threatening tariffs on countries like Canada and Mexico, which he accuses of unfair trade practices. These protectionist policies have rapidly evolved into a full-scale trade war, raising concerns that they may end up harming the very industries they were meant to protect.

The imposition of a broad 25% tariff on imports of steel and aluminum, followed by exemptions, negotiations, and extensions, has sparked debates about the long-term impact on consumer prices. While the immediate effects on consumer costs remain uncertain, it is becoming increasingly clear in Turnleaf’s models that one of the key factors influencing inflation may not be the tariffs themselves, but the rising costs of electricity generation.

The U.S. is already experiencing increased electricity needs from sectors such as manufacturing and the rapidly growing data center industry. These energy-intensive industries are driving up demand for power, which could eventually result in higher costs for consumers. The Producer Price Index for data processing and related services has recently spiked, reflecting the rising energy costs linked to the rapid expansion of AI infrastructure and data centers (Figure 1).

Figure 1

Efforts to strengthen the competitiveness of domestic steel and aluminum production are likely to increase electricity demand, given the industry’s heavy reliance on electricity. For instance, electricity makes up 40% of the total production cost in aluminum smelting. As demand for electricity increases, producers will likely face higher costs as they compete for limited energy resources, potentially driving up producer and consumer prices. This challenge is further intensified by existing regulatory constraints on the electricity grid.

Since 2024, the U.S. has become more reliant on electricity imports (Figure 2). New threats of retaliatory surcharges ranging from 25% to 100% on electricity exports from Canada, which supplies about 93% of U.S. electricity imports, could drive up costs and further contribute to inflationary pressures.

Figure 2

Electricity prices are closely tied to the cost of natural gas, which makes up 42% of U.S. electricity generation. While natural gas has helped keep inflationary pressures in check so far, the situation is shifting. Domestic supply constraints and rising global demand are expected to push prices higher.

Data from the U.S. Energy Information Administration shows a YoY decline in working gas storage in the East Region (Figure 3), while U.S. natural gas exports rose by over 30% in January 2025. This has reduced the supply available for domestic use, which has remained stable in recent months.

Figure 3

Meanwhile, natural gas futures, which spiked to nearly $9 in 2022, have moderated but have gradually increased from around $3 to over $4 (see Figure 4). This upward trend suggests that the market expects supply constraints to tighten as demand continues to rise.

Figure 4

In addition, the number of active natural gas rigs in the U.S. has fallen by over 15% YoY in March 2025, suggesting that production may struggle to keep up with rising demand. This decline, along with increased consumption from energy-intensive sectors, points to the likelihood of higher natural gas prices, which would place further strain on electricity.

Though the exact impact of imposed tariffs on consumer prices remains to be seen, energy costs are emerging as a possible upside risk to U.S. inflation. The growing demand for electricity, coupled with outdated infrastructure, existing regulations, and rising natural gas prices, is likely to result in higher costs for consumers. Moving forward, it will be crucial to monitor changes in the energy sector, including natural gas supply and demand, as these factors will play a pivotal role in shaping U.S. inflation trends in the coming years.