Conclusions about tariff’s impact on inflation are off base, premature

Supporters of President Donald Trump’s tariffs have already been running victory laps, insisting that recent numbers are proving naysayers wrong.

Treasury Secretary Scott Bessent crowed on X that “Once again, the inflation propagandists have been proven wrong” in response to his counselor’s post declaring that “inflation is trending lower.”

The proclamations were a bit confusing given that June’s inflation report showed an annual rate of 2.7%, up from 2.4% in May.

Nevertheless, recent rhetoric surrounding the inflationary impacts of tariffs typically miss the true underlying cause of inflation and are far too premature anyway.

Inflation is an overall increase in prices of a government-defined “basket of goods,” made up of commonly purchased items.

What causes this overall increase? As Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.” By that he meant that inflation can be caused only by an increase in the money supply, resulting in more money chasing the economy’s supply of goods and services.

In that sense, tariffs themselves cannot be inflationary. Economist Henry Hazlitt wrote the most concise essay on inflation, called “Inflation in One Page.” Hazlitt elaborated on Friedman’s point, writing, “Higher costs can only be passed along in higher selling prices when consumers have more money to pay the higher prices.”

Without an increased supply of money, an overall increase in prices is not possible. If there was a stable supply of money, increases in the prices of some goods and services would necessarily be offset by decreases in prices of other items. The overall price level would remain flat.

This is not to overlook, however, the very real possibility that tariffs will increase prices on certain goods, hitting households spending a larger share of their income on those goods disproportionately hard.

On that score, it is far too premature to say if tariffs have driven up the price of tariffed imports and other goods less directly impacted by tariffs, such as those finished goods using imported inputs.

Because of multiple “pauses” by President Trump, the bulk of tariffs have been delayed until Aug. 1. It’s irresponsible to make conclusions about the impact of tariffs that have not even been implemented yet.

There have been, however, some indications of how tariffs will impact the economy.

For instance, after Trump’s Feb. 1 executive order announcing tariffs on Canada, Mexico, and China, the stock market dropped about 16% in two months. Market investors were spooked by tariffs. The market has since recovered, largely due to the pause in tariffs causing investors to breathe a sigh of relief.

Moreover, imports surged in the first quarter, up by 26% over historical trends, according to a report by the University of Pennsylvania’s Wharton School of Business. Businesses and consumers sought to avoid higher prices on imports due to scheduled tariffs by upping their orders prior to the tariff’s implementation, a surge that subsided in April as some tariffs were implemented.

After Trump’s July 8 announcement of 50% copper tariffs, copper prices surged 13% in one day to new all-time highs. Ole Hansen, head of commodity strategy at Saxo Bank, said the 50% tariff would be a “massive tax on consumers of copper.”

The National Association of Home Builders in March estimated that tariffs would cause a price increase of a typical new home of more than $9,000, and that was before the announced copper tariffs. Estimates suggest that nearly 440 pounds of copper go into the construction of each new home.

Tariffs on foreign cars could increase the cost of a new car in the US as much as $6,000 for vehicles priced under $40,000, according to Kelley Blue Book.

So yes, it is highly likely that tariffs will increase the prices of affected goods. Taking away or otherwise limiting affordable choices from foreign countries leaves only more expensive options for American consumers. This will force difficult choices, because as consumers are forced to spend more for some goods, they will have less money available to spend on other goods or services.

Overall price levels may not be impacted, but certain households will certainly be impacted more than others, depending on their mix of consumption spending.

Tariff supporters claim that foreign companies will “eat” the tariffs, meaning they will pay the tariffs out of revenue and eat into profits rather than pass along the cost in higher prices. But this is unsustainable. Profit margins for most companies can absorb only so much of a hit for so long. Over time we will see fewer imports as foreign producers decide to scale down or pull out of the American market, leaving fewer choices for consumers.

But won’t these higher prices be worth it to “bring back” manufacturing jobs? After all, that seems to be the main argument made by tariff supporters — that tariffs are a tool to reshore the manufacturing base the US has lost to other countries.

How’s that working out?

In the last three months, the US has lost roughly 14,000 manufacturing jobs. This trend may change when — and if — the bulk of the tariffs are implemented next month, but the early returns are not encouraging.

Tariff supporters are far too premature to claim that tariffs are not inflationary, while the focus should not be on overall inflation anyways. The focus should instead be on specific products and industries affected by the tariffs, and evaluation should wait until the tariffs have been fully implemented and given time for their impacts to take effect.

“Conclusions about tariff’s impact on inflation are off base, premature” was originally published on www.carolinajournal.com.