Do Tariffs Cause Inflation? New Studies Offer Surprising Answer

Trump’s tariffs haven’t caused the surge in prices that many economists predicted

By Konrad Putzier of The WSJ. Excerpts:

"Economists at the Federal Reserve Bank of San Francisco combed through data from 1886 to 2017 and found that previous tariff increases usually didn’t lead to higher inflation. On the contrary: They slowed down price growth. A separate recent paper by economists at Northwestern University found that inflation picked up following tariff increases, but only a little."

"tariffs tend to hurt the economy and that a blow to consumer and business demand likely explains why the impact on inflation is so limited."

"Basic economic principles suggest that higher tariffs should push up the price of imported goods, typically leading to a one-time increase in inflation. But . . .  a 1-percentage-point increase in tariffs went along with a 0.6-percentage-point drop in inflation. "

"rising tariffs went hand in hand with rising unemployment, which may help explain the inflation riddle. Tariff shocks create economic uncertainty, weighing on businesses and consumers. As the economy slows, demand for goods and services falls, weighing on prices."

Other research shows "that tariff increases were usually followed by slightly higher inflation. But the impact was small because rising import costs were counterbalanced by falling demand as imports and exports dropped and manufacturing activity contracted."

"Hiring has slowed to a crawl since April"

"a key index tracking activity in the manufacturing sector fell to a 14-month low in December."

"Some economists argue that Trump’s tariffs will eventually have a bigger impact on inflation as companies gradually raise prices. Others point out that the real tariff rates companies actually pay are lower than the headline numbers, thanks in part to loopholes and exemptions". 

"the real average tariff rate was 14.1% as of late September, well below the headline number of 27.4%."

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