Posted on 03/21/2025 7:41:57 AM PDT by Miami Rebel
There was an oft-repeated message in Federal Reserve chair Jerome Powell’s press conference on Wednesday: Tariffs will raise consumer prices.
The U.S. central bank raised its inflation forecast for 2025, as have many economists, due to the expected impact of a trade war initiated by the Trump administration.
“A good part of it is coming from tariffs,” Powell said of the Fed’s elevated inflation estimate.
“I do think with the arrival of the tariff inflation, further progress may be delayed,” Powell said.
His statement comes at a time when pandemic-era inflation has gradually declined but hasn’t yet been fully tamed to the Fed’s goal of a 2% annual inflation rate.
“Tariffs are simply inflationary, despite what [President] Donald Trump may tell people,” said Bradley Saunders, a North America economist at Capital Economics.
Tariffs are a tax on imports. U.S.-based importers — say, clothing retailers or supermarkets — pay the tax so goods can clear customs and enter the country.
Tariffs raise prices for consumers in a few ways, economists said.
For one, tariffs add costs for U.S. businesses, which may charge higher prices at the store rather than take a hit on profits, Saunders said.
Tariffs are a protectionist economic policy, meaning they seek to protect U.S. businesses from international competition by making foreign products more expensive.
Consumers may switch to a U.S. product rather than pay a higher price for the foreign counterpart. However, that logic may not pan out. The U.S. substitute was likely more expensive than the foreign product to start, Saunders said — otherwise, why wouldn’t consumers buy the U.S.-produced good to begin with?
So tariffs may still leave the consumer paying more, whichever products they choose to buy, he said.
Tariffs on Canada, China and Mexico, for example, would cost the typical U.S. household about $1,200 a year, according to a February analysis by economists at the Peterson Institute for International Economics. (This analysis modeled the direct costs of a 25% tariff on Canada and Mexico, and 10% additional tariff on China.)
The president’s economic agenda, including tariffs, will create new jobs, White House spokesperson Kush Desai said in response to a request for comment from CNBC about the inflationary impact of tariffs.
Trump has imposed a slew of tariffs since taking office in January.
The Trump administration raised levies on imports from China and on many products from Canada and Mexico — the three biggest trade partners of the U.S. It put 25% tariffs on steel and aluminum and plans to put reciprocal tariffs on all U.S. trade partners in April. The White House also signaled duties on copper and lumber are forthcoming.
During his first term, President Trump imposed tariffs on about $380 billion of imports, in 2018 and 2019, according to the Tax Foundation. The Biden administration kept most of them intact.
This time around, the tariffs are much broader. They currently impact more than $1 trillion, the Tax Foundation said. The sum will increase to $1.4 trillion if temporary exemptions for some Canadian and Mexican products lapse in early April, it said.
It was largely a “U.S.-China” trade war during Trump’s first term, Saunders said. “Now it’s a “U.S.-everyone trade war,” he said.
There are indirect consumer impacts from tariffs, too, economists said.
To that point, many U.S. companies use products subject to tariffs to manufacture their goods.
Take steel, for example: Automakers, construction firms, farm-equipment manufacturers and many other businesses use steel as a production input.
Tariffs may raise auto prices by $4,000 to as much as $12,500, depending on different factors like vehicle type, according to an estimate by consulting firm Anderson Economic Group.
Builders estimate that recent tariffs will add $9,200 to the cost of a typical home, according to the National Association of Home Builders.
Economic studies suggest that, while tariffs may create jobs in certain protected U.S. industries, they ultimately cost U.S. jobs on a net basis, after accounting for retaliation and higher production costs for other industries.
“By trying to protect certain industries, you can actually make other industries more vulnerable,” Lydia Cox, an assistant professor of economics at the University of Wisconsin-Madison who studies international trade, said during a recent webinar.
Trump has said the administration’s tariff policy may cause short-term “pain” for Americans.
Economists stress that there’s ample uncertainty, and that a bump in inflation may be temporary rather than something that raises prices consistently over the long term.
Treasury Secretary Scott Bessent alluded to this outcome during a recent CNBC interview.
“Tariffs are a one-time price adjustment,” Bessent said. He also the Trump administration was “not getting much credit” for falling costs of oil and mortgages rates.
The Federal Reserve raised its 2025 inflation forecast by 0.3 percentage points to 2.8% in its summary of economic projections issued Wednesday, up from its 2.5% estimate in December. (This projection is for the “core” Personal Consumption Expenditures Price Index. PCE is the Fed’s preferred inflation gauge, and core prices strip out the volatile food and energy categories.)
Similarly, Goldman Sachs Research expects core PCE to “reaccelerate” to 3% in 2025, up about half a percentage point from its prior forecast.
“It’s really hard to know how this is going to work out,” Fed chair Powell said.
The best case is that our trade partners capitulate before the new tariffs take effect.
the tariffs kick in April 2nd.
All taxes are inflationary. Also, all spending by government is inflationary.
bflr
The tariffs that have been in place against the USA for years didn’t cause inflation?
Small-minded economist. Not unusual.
Ignore theoreticians. Believe inn actual results. Trump-45 imposed tariffs in his term. Inflation was at record low.
Isn't it strange how EVERY OTHER NATION ON EARTH can handle the economic impacts of their many many tariffs, but the wealthiest and strongest economy on earth cannot?
Hmm...
Guess not since their tariffs are so high, few USA products are purchased, benefiting in-country producers.
This economist seems to think that consumer behavior in the USA is such that USA-produced products won’t be purchased, regardless of imported products’ prices?
The goal of Trump's tariffs are to bring back off shored manufacturing.
Trump succeeded in turning the country around using tariffs in his first term and the country would be in much better shape if Biden had not been elected and destroyed all the progress Trump had made.
Tariffs may be required to meet defense and foreign policy goals, but Trump needs to be honest about the real economc harm they can cause for Americans:
1. They’ll be higher prices for domestic consumers or produces using foreign inputs. That’s their purpose and effect.
2. When we import, foreigners don’t just stuff their dollar payments into their closets. If we don’t import, foreigners won’t earn the dollars they use either (a) to import from the USA or (b) to invest in the USA. (Holding dollars in banks is an investment.) This means fewer physical ivestments or higher interest rates.
3. Foreign governments will retaliate, leading to job losses and reduced profits for Americans.
It was low throughout the first term, but it was actually lowered in 2015.
Milton Friedman’s well known dictum is that inflation is “everywhere and always a monetary phenomenon”.
That’s a fancy way of saying it’s caused by increases in the quantity of dollars.
Tariffs, like taxes, don’t increase the money supply. They can increase the price of the affected products. But they do not cause the generalized loss of buying power that inflation does to the dollar.
It seems like grocery prices are coming down a little too.
Empirically, that’s just not so. High deficits did not produce high inflation in President Trump’s first term.
As regards bringing back manufacturing, what industries do you see as most likely to repatriate jobs?
Milton Friedman believed that economics was only about economics but economic policy can effect national security. People like him caused China become a global menace for cheaper tennis shoes and steel.
Oh, c’mon, you can’t have actually expected a gov’mt official to admit the obvious truth about anything?
Aside that, only printing more $$ bills is inflationary. Doing something over here that causes a price increase will have a compensatory effect over there — that is how a free market works. Price inflation is only for long term if the demand rises.
“big drivers of inflation are massive government deficit spending”
Especially when the money is printed, as Hussein used to say, “quantitative easing.”
Trumps goal is not to have tariffs; it’s to take tariffs out of both sides of the equation. He will point out the pluses to our imposing tariffs in order to demonstrate willingness to go that way if the other side chooses to keep their punitive tariffs, but his intent is to make them see the value of tariff-free trade. It has worked well for him in the past. These people just don’t get that he is the best publicly-known negotiator there is. They just don’t learn.
If tariffs are inflationary to those who impose them why doesn’t China have inflation? 🤔
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