The Fed Finds That Trump's Tariffs Are Propping Up Inflation

In the United States, we have been told a simple story about inflation: the pandemic hit, the government intervened, and prices went up. As I argued before, quantitative easing from the Federal Reserve combined with high levels of government spending set up the U.S. for high levels of inflation in 2022-23. What this does not explain so well is why prices have not come back down. 

According to a recent study from the Federal Reserve, there is a reason why: Trump's tariffs. Even as the pandemic faded in the distant memory, the tariffs kept the inflation hangover lingering beyond the pandemic. This is not a mystery. Tariffs raise consumer prices because they are a tax on imports. Business then pass on the majority of that cost to consumers. As long as the tax remains, the tariffs create a pre-tax and post-tax price, which keeps prices elevated. 

What the Federal Reserve study does is calculate the counterfactual of "what would have happened if there were no tariffs?" The answer is bonkers when you think of the political hoopla about affordability. If Trump's 2025 tariffs were never implemented, consumer prices would be back to pre-pandemic levels (see below). 

As frustrating as this is, this is far from surprising. Last August, I discussed what the economic effects from these tariffs would be. Those costs ranged from a lower GDP and higher unemployment to....you guessed it: higher consumer prices. This is additional evidence to show that it is the everyday American that is paying for Trump's tariffs, not China, Mexico, or any other foreign country. It was lousy government policy that got us into this mess, and it was the tariffs that kept the inflation sticking around much longer than necessary. 

This problem was avoidable as it was predictable. If Congress wants to do something about affordability, it can reclaim its tariff powers enumerated in the Constitution. It turns out that "America First" pricing means that it is the everyday American that first and foremost pays the costs for Trump's tariff folly.