As I noted back then (and later discussed with Jonah on The Remnant), most economists wouldn\u2019t predict or suggest that tariffs\u2014even big ones\u2014will cause a major and persistent bout of \u201cinflation,\u201d which is understood to be a sustained increase in the price of everything that we consume (aka the \u201cgeneral price level\u201d) or a decline in the value of the dollar unit. The government calculates the CPI and PCE\u2014proxies for the macroeconomic phenomenon of inflation\u2014by broadly surveying a basket of both goods and services, including many things like housing, health care, and recreation that wouldn\u2019t directly be affected by tariffs (even global ones). Here\u2019s a handy breakdown of the CPI from 2023:<\/p>\n
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As for why we have inflation, a simple rule of thumb is that it\u2019s caused<\/a> by \u201ctoo much money chasing too few goods,\u201d thus implying both demand-side and supply-side factors. Economists generally agree that the drivers<\/a> of inflation are broad, economy-wide forces and policies\u2014not narrower things like tariffs.<\/p>\n On the demand side, this mainly means monetary and fiscal policy (putting more or fewer dollars into people\u2019s hands to spend and changing their incentives to spend those dollars)\u2014and here tariffs will have little effect on \u201cinflation\u201d properly understood. Instead, economists expect tariffs to affect the relative prices of tariffed goods but not cause longer term \u201cinflation\u201d because, without changes to the monetary\/fiscal policies, businesses and consumers 1) will pay more for tariffed goods and thus spend less on other things, thereby reducing overall demand therefor (meaning lower prices for that stuff); and\/or 2) will be turned off by goods\u2019 tariff-inflated prices and choose instead to spend their finite dollars on other things.\u00a0<\/p>\n The supply side of the inflation equation depends on real, economy-wide output, and here tariffs\u2014especially broad ones\u2014can have an effect by restricting that output (via higher input prices and economic activity pushed toward protected, less efficient industries). As the Cato Institute\u2019s Norbert Michel and Jai Kedia explained<\/a> back in March: \u201c[T]ariffs result in higher prices and fewer goods available for sale in the United States. The higher and more widespread the tariffs, the bigger the reduction in goods and the larger the price increases.\u201d<\/p>\n As you\u2019ll recall, the Trump 1.0 tariffs were fairly targeted\u2014steel, aluminum, washing machines, China imports (half), solar panels, etc.\u2014and thus comprised a relatively small share of the goods measured in price indexes like the CPI. As a result (and because fiscal\/monetary policy remained steady), those tariffs had an insignificant effect on the general price level and on inflation overall, even though numerous studies have since shown that U.S. consumers were paying higher prices for the tariffed goods at issue.\u00a0<\/p>\n The bigger, global Trump 2.0 tariffs should have bigger effects, but the general principles still apply. Economist Bryan Cutsinger recently summarized<\/a> the consensus view:<\/p>\n There seems to be broad agreement that higher tariffs lead to a one-time increase in the price level, not a sustained rise in the rate of price increases, that is, inflation. If it takes time for tariffs to pass through to consumer prices, inflation may temporarily pick up \u2014 a point Fed officials have acknowledged. But once the adjustment is complete, the inflation rate will come back down \u2014 that is, the increases will stop, even if prices themselves remain at a new, higher level.<\/p>\n Put another way, global tariffs will increase the price level but not its rate of change (aka \u201cinflation\u201d)\u2014at least not in the longer term. Thus, most economists expect the CPI or PCE to tick up this year because of Trump\u2019s tariffs, but only temporarily. (In general, the widely held view among various professional economists is that we\u2019ll see a gradual, 1-ish percentage point increase in the CPI and PCE figures, peaking later this year and early next but mostly subsiding after 2026.) Those higher prices still mean pain for American consumers, of course, but the increase wouldn\u2019t technically be \u201cinflation\u201d as economists understand and define it. And any CPI uplift we do see in the coming year or so will pale in comparison with the recent post-pandemic inflation we\u2019ve lived through, because imported goods are still relatively small shares of Americans\u2019 total spending.<\/p>\n So, from a theoretical perspective, discussions of tariffs emphasizing their effect on the overall CPI number and \u201cinflation\u201d are mostly missing the boat. It\u2019s an issue, especially given all the uncertainty right now, but it\u2019s not the issue\u2014and few serious economists have said otherwise. (Far more of them, in fact, have said just the opposite.)<\/p>\n A Muted Response\u2014So Far\n<\/p>\n There are also several well-documented reasons for why even a temporary tariff-fueled increase in U.S. prices hasn\u2019t materialized yet\u2014and, in fact, might never show up fully in the CPI or other broad measures of inflation. For starters, Trump quickly rolled back some of his biggest tariffs (e.g., China and \u201cLiberation Day\u201d) and temporarily exempted<\/a> many other products\u2014semiconductors and consumer electronics, pharmaceuticals, many USMCA-compliant products, etc. As a result, a new report from Goldman Sachs (no link, sorry) shows, the average effective U.S. tariff rate is lower than some of the topline figures he has threatened (though it remains historically high)\u2014and sat at about 9 percent through May of this year.\u00a0<\/p>\n Then there\u2019s the timing issue. Goldman notes that, from a purely mechanical perspective, it takes several weeks between the date of a tariff announcement and the tariff being paid by U.S. importers:<\/p>\n Meanwhile, American companies have worked hard to avoid paying the tariffs that are now in force. Most notable in this regard were their efforts to import goods before tariffs hit, thus resulting in a big spike in imports<\/a> between November and April \u2026\u00a0<\/p>\n \u2026 and a resulting bulge in domestic inventories<\/a>:<\/p>\n Stories abound of various companies and industries engaging in this simple and common tariff-avoidance scheme. The Wall Street Journal reported<\/a> last month, for example, that U.S. pharmaceutical companies between January and April imported $36 billion worth of Irish-origin hormones that are used in popular obesity drugs\u2014\u201cmore than double what was imported from Ireland for all of last year.\u201d In one of my favorite examples<\/a>, the CEO of Levi Strauss told investors in early April that, to avoid possible tariffs, it had \u201calready imported most of the products it needs for spring and summer seasons,\u201d giving them around six months of non-tariffed stock. Most importers (especially smaller ones) aren\u2019t carrying that much inventory, but many had built up a substantial cushion before the biggest tariffs hit. Goldman notes other spikes for automotive, steel, and aluminum imports and suggests these efforts will allow U.S. companies to delay or spread out tariff costs for several more months, meaning less immediate pressure on their earnings and consumer prices.<\/p>\n Companies are also deploying other strategies to avoid taking a full tariff hit\u2014at least in the short term. They are, for example, engaging in \u201ctariff engineering<\/a>\u201d\u2014reclassifying products into lower-tariff categories or ones with no tariffs at all. In one particularly ridiculous case<\/a>, Delta Airlines is stripping out U.S.-made engines from its new Airbus jets in Europe and then installing them in grounded, U.S.-based planes\u2014all to avoid Trump\u2019s tariffs. Companies are also reconfiguring their supply chains to put final production in lower-tariff locations or to qualify under the USMCA (filing new paperwork along with it). They\u2019re flooding into<\/a> \u201cbonded warehouses\u201d and \u201cforeign trade zones,\u201d which allow importers to bring goods into the United States and pay duties only when they\u2019re removed from the warehouse\/zone and officially entered into U.S. commerce. All these efforts have a cost, of course, but it\u2019s much lower than the tariffs themselves.<\/p>\n Then there\u2019s the issue of foreign exporters eating the tariff costs by lowering their prices\u2014Trump\u2019s favorite excuse. As we\u2019ve discussed<\/a>, this is possible under the right circumstances but didn\u2019t happen much during Trump 1.0, as American companies and consumers instead ate almost all of the tariffs\u2019 costs. This time around, however, Goldman notes<\/a> that there are some very early signs that foreign exporters, mainly Chinese, \u201chave absorbed about 20% of the cost of tariffs\u201d\u2014an outcome that makes some sense given the sheer size of the tariffs, lingering inflation pain here, and widely reported deflationary problems in China. If these preliminary data hold, it\u2019d be a shift from recent U.S. tariff experience but would still mean that Americans are paying about 80 percent of the tariffs\u2019 cost\u2014not exactly a huge Trump win. Other evidence, it should be noted, shows foreigners paying even less.<\/p>\n As tariffs really start to bite, the big questions will be whether foreign exporters keep eating some costs if it becomes clear tariffs are here to stay and how the remaining \u201c80 percent\u201d (or more) filters through the U.S. economy and into consumer prices\u2014for both imports and domestic goods and services. And here, too, there are reasons to expect that the new costs won\u2019t fully be evident in topline U.S. consumer price (inflation) data.\u00a0<\/p>\n Most obviously, and as we discussed in September, American companies can eat the tariff costs themselves:<\/p>\n [W]hether end-consumers like you and me will see increased prices of tariffed goods depends on whether U.S. companies\u2014importers, manufacturers, wholesalers, retailers, etc.\u2014pass on the higher prices they\u2019ve paid. In some cases, they don\u2019t. (Maybe, for example, they prefer to maintain market share and thus decide to just eat the tariffs\u2019 cost and accept lower profits.) This can spare American consumers, but\u2014just like corporate taxes\u2014it doesn\u2019t mean the tariffs are costless because the companies paying have less money for hiring, investment, and so on. And none of this changes the simple, basic, and obvious fact that\u00a0someone\u00a0in the United States paid more because of a protective tariff. Again, that\u2019s the whole point.<\/p>\n Goldman estimates, in fact, that U.S. businesses have initially absorbed much of the new Trump tariff costs instead of passing them on to consumers, thus leading to a much more moderate impact on the inflation figures. Over time, however, they expect this balance to change and for consumers to bear half or more of the tariff costs (and related increases of U.S. goods\u2019 prices<\/a>), with price data eventually reflecting that burden. Anecdotes and alternative data, such as Federal Reserve surveys of U.S. businesses, show similar things.<\/p>\n American companies also are deploying clever ways to pass on their higher, tariff-related costs through things other than retail prices, thus potentially avoiding the ire of both inflation-weary American consumers and a certain U.S. president. This includes removing perks<\/a> like free shipping or returns; leaning into resales<\/a> of used or opened items that never faced tariffs; offering less favorable finance terms or fewer discounts; ceasing to sell<\/a> lower-margin products; adding \u201ctariff surcharges\u201d to invoices; removing accessories and selling them separately; or using cheaper or downgraded parts in their products. Some of these things will show up in the CPI data, but some of them won\u2019t. Regardless, they all still mean that American consumers are paying tariff costs\u2014just less visible ones.<\/p>\n Still Reasons to Worry\n<\/p>\n Despite these mitigating factors, economists still expect a lot of Trump\u2019s tariffs to eventually show up in the CPI and other broad measures of U.S. prices. Not only are the effective tariff rates rising, with more still to come, but inventories are dwindling and other tricks like bonded warehouses can only work for so long. Many companies, meanwhile, simply don\u2019t have the profit margins to absorb all their new tariff costs\u2014and, even if they did, their shareholders might not be too thrilled with that approach. (Foreign companies have the same problem.)\u00a0<\/p>\n Finally, many U.S. companies have announced price increases, and more are on the way. I asked Claude AI to come up with a list of at least 100 public price hike announcements since February 1, 2025, and the bot completed the task in around 10 minutes\u2014hooray, technology. Meanwhile, various data sources\u2014including the CPI<\/a>\u2014show that Trump\u2019s tariffs are starting to show up<\/a> in national economic data. According to the Washington Post\u2019s Heather Long, for example, the June CPI report showed<\/a> the prices of import-sensitive categories\u2014linens (+5.9 percent), cookware (+4 percent), audio equipment (+2.9 percent), appliances (+2.4 percent), sports equipment (+1.8 percent), toys (+1.4 percent), and more\u2014experiencing abnormally large monthly gains. The Yale Budget Lab\u2019s Ernie Tedeschi finds that goods are increasingly contributing<\/a> to \u201cexcess\u201d inflation this year and a clear break<\/a> in the pre-Trump price trends for furniture, apparel, and electronics:<\/p>\n Beyond the CPI report, the Harvard Business School\u2019s new Pricing Lab examines price data in real time and finds a clear upward trend in the prices of imported goods affected by tariffs and an almost identical trend<\/a> for the same American-made goods. As tariffs rise and inventories disappear, we should see more of these price hikes in the months ahead. Economists also expect higher goods prices to eventually ripple into services like construction (via costlier materials), maintenance and repairs (via costlier parts), automotive insurance (via costlier cars and repairs), and health care (via costlier medical goods and drugs).\u00a0<\/p>\n But, again, this doesn\u2019t necessarily mean we\u2019ll see persistent \u201cinflation.\u201d<\/p>\n At this point, the issue is less about whether tariffs cause higher prices but when the biggest hikes will hit. There\u2019s no great, clear answer but\u2014if recent trends hold<\/a>\u2014it should<\/a> be sometime this fall.<\/p>\n We shall see. Regardless, dismissing the modest CPI and PCE data published so far\u2014especially as some sort of hit on the \u201ceconomists\u201d\u2014ignores not just theory but a boatload of reality too.<\/p>\n Summing It All Up\n<\/p>\n So, we shouldn\u2019t expect Trump\u2019s new tariffs to cause major \u201cinflation\u201d in the months ahead, but there are plenty of reasons to expect a significant, but temporary, spike in U.S. prices later this year. And some of the latter is already showing up in the data. Most people who actually do this stuff<\/a> for a living (aka not TV pundits or viral posters) have been saying these exact things for more<\/a> than a year<\/a> now, so\u2014as you can imagine\u2014constantly repeating them in response to endless \u201cinflation\u201d inanity has become one of the more pointless and annoying parts of the job.<\/p>\n Probably the most annoying part, though, is that these technical details just aren\u2019t something that matters to the vast majority of normal Americans. Sure, if you\u2019re a Federal Reserve watcher, financial journalist, or investment banker, the precise trajectory and composition of our nationwide inflation indices is important. And the Fed\u2019s current wait-and-see approach to monetary policy and tariffs certainly isn\u2019t beyond debate, nor is the ultimate effect of Trump\u2019s tariffs on real inflation in the United States. (FWIW, I know a lot of smart folks who think Fed Chairman Jay Powell is wrong to hold off on lowering interest rates because of tariff-related uncertainty; other smarties<\/a>, meanwhile, see his position as defensible<\/a>\u2014especially with other signals pointing his way.)<\/p>\n For most Americans, however, what matters isn\u2019t the precise CPI reading or whether professional forecasters nailed their latest monthly predictions, but instead our actual living standards and\u2014as our last election taught us<\/a>\u2014the price level, not its technical rate of change over a month or year. And here the tariff story isn\u2019t in doubt: First, they will<\/a> make many U.S. prices rise and, in fact, have<\/a> already<\/a> started doing<\/a> so<\/a>. And second, we will be poorer, regardless of what the Federal Reserve does.<\/p>\n Put simply, the primary problem with tariffs isn\u2019t that they\u2019re \u201cinflationary\u201d; it\u2019s that they reduce the efficiency of our economy by distorting prices and undermining our capacity to produce real income. We pay (and work) more for less and end up materially worse off\u2014regardless of what the CPI says.\u00a0<\/p>\n Obsessing over \u201cinflation\u201d distracts from this reality, and that\u2019s probably why the protectionists keep doing it.<\/p>\n Chart(s) of the Week\n<\/p>\n Chinese exports keep climbing<\/a><\/p>\n Rent control comes for Montgomery County, Maryland, in 2025:<\/a><\/p>\n The Links\n<\/p>\n Upcoming Cato\/Congress events on the Jones Act<\/a> and tariff reform<\/a><\/p>\n No, tariffs didn\u2019t eliminate the budget deficit<\/a><\/p>\n Plunging dollar hits U.S. tourists abroad<\/a><\/p>\n Huzzah: universal licensing in North Carolina<\/a><\/p>\n Production isn\u2019t the goal<\/a><\/p>\n Endless China consumer subsidies?<\/a><\/p>\n The amazing economics of Kirkland Signature<\/a><\/p>\n Seattle\u2019s \u201cAmazon tax\u201d is doing its thing<\/a><\/p>\n The He Just Likes Tariffs bandwagon grows<\/a><\/p>\n U.S. spirits suffer in Canada<\/a><\/p>\n Blood plasma centers reduce crime<\/a><\/p>\n![\"\"](\"https:\/\/www.newsbeep.com\/ca\/wp-content\/uploads\/2025\/07\/image3.png\")
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