Why tariffs haven't caused runaway inflation — yet

Vox

2 days ago

covers politics Vox. She first joined Vox in 2019, and her work has also appeared in Politico, Washington Monthly, and the New Republic.
Initial predictions about runaway inflation and empty shelves after President Donald Trump announced his sweeping tariffs in April have yet to materialize.
Some in the Trump administration have taken that as a sign that he should double down on tariffs. Earlier this month, Treasury Secretary Scott Bessent posted on X that the 'inflation propagandists have been proven wrong.' White House press secretary Karoline Leavitt said in a statement that 'President Trump is stabilizing inflation and the 'panicans' continue to be wrong about tariffs raising prices.'
Trump himself crowed on his social network Truth Social: 'Consumer Prices LOW,' he wrote, urging the Federal Reserve to bring down interest rates in response.
Their declarations of success, however, are likely premature.
The first indication that inflation might be ticking up came in June, when the consumer price index increased by 2.7 percent, up from 2.4 percent the previous month. The prices of food, housing, and used cars increased at even higher rates.
And they may not be done climbing. Economists told Vox that the upward trend is likely to continue, so long as the tariffs remain in effect. Companies have taken steps to ride out the uncertainty that tariffs cause, but before the end of the year, they will face untenable financial pressure to raise prices, absent major changes in US trade policy.
'By the time we get to the end of August, you'll kind of look back and it will appear that directionally, the people who said tariffs would increase prices over the summer were right,' said Daniel Hornung, a senior fellow at MIT and former deputy director of the National Economic Council under the Biden administration.
Why tariffs increase prices
Trump's tariffs are predicated on a faulty assumption that countries with a trade imbalance with the US — in which they export more to the US than they import from it — are taking advantage of America.
Trump's rationale ignores why those imbalances might exist in the first place. One factor is the population profile of countries that trade with the US: Vietnam, for example, exports more than it imports from the US because it is relatively poor and cannot afford to buy many American-made goods.
Americans' consumption tendencies also lead to trade imbalances. Compared to other Western countries, Americans are a younger and faster-growing population, one that saves less and spends more on imported goods relative to its counterparts overseas.
There is also high foreign investment in the US, in part driven by the fact that the dollar is the world reserve currency and by the perception that American real estate and government debt are attractive investments.
Trump misunderstands these dynamics, and economists argue that tariffs won't change them.
The president, nevertheless, believes that tariffs can rectify these imbalances by spurring a renaissance of domestic manufacturing, causing the US to import less, export more, and create more jobs. But that's also unlikely.
The economy runs on confidence in the future. Businesses make plans months or years in advance hoping that their investments will eventually pay dividends. Consumers, too, are more likely to spend on goods and services that these businesses sell when they feel good about their prospects. Their spending helps support economic growth and a solid job market.
The uncertainty about whether and when Trump's tariffs will roll out, and at what cost, has given businesses little reason to make massive new investments in US factories spanning years into the future. Such investment could be a risky bet when it's not clear if Trump will back down on the tariffs — or be forced to do so as part of a pending court case — in a matter of months.
In the meantime, tariffs will increase costs for producers and retailers, which they eventually have to pass on to US consumers if they wish to maintain their profit margins.
Why hasn't inflation increased dramatically yet?
So far, companies have managed to avoid drastic price increases for a few reasons.
For one, the rollout of tariffs against many major US trading partners has been delayed until August 1. That includes a 35 percent tariff on Canada, a 50 percent tariff on Brazil, a 25 percent tariff on South Korea, and a 30 percent tariff on the European Union and Mexico.
The Trump administration has been trying to negotiate deals with all of them before the August 1 deadline. On Wednesday, Japan announced a deal with the Trump administration that allowed it to avert higher tariff rates, but it will still face a 15 percent tariff on all exports to the US.
Notably, the US has also reached a temporary trade deal with China that lowered tariffs from 145 percent to 30 percent. That deal expires August 12, but Bessent has suggested that it is likely to be extended.
Collecting tariffs has yet to begin or has only recently begun for many countries, so the tariffs' impact on prices has lagged — but it's still on the horizon. Preston Caldwell, chief US economist for Morningstar, said that he predicts that inflation will peak not in 2025, but rather in 2026, as that impact spreads through the economy.
And the effect will be acute, given that even countries that have secured deals with the US face tariffs that would have once been unthinkably high. A flat 10 percent tariff on all imports was considered a nightmare scenario before Trump took office.
'I don't think predictions of inflation were wrong,' said Matt Colyar, an economist for Moody's Analytics. 'I just think it's a matter of timing.'
Companies have been reluctant to raise prices sharply and potentially drive away customers who were already struggling to keep up with inflation in the post-pandemic era. The Yale Budget Lab has projected that the tariffs could cost Americans an average $2,300 per household.
But some retailers also made preparations to mitigate the initial impact of tariffs on their businesses. Businesses that can afford it have been stockpiling inventory for months in an attempt to keep prices low and ride out the tariffs, hoping that Trump will change course. But their inventory will only last so long.
'Companies have started paying tariffs on their imported goods, but as far as the goods that are being sold in stores right now, those are primarily being drawn from the inventory of goods that were brought in before the tariffs,' Caldwell said. 'So most companies are still not really having to recognize the loss of tariffs yet to a great degree.'
What happens next
There are some categories of goods that are likely to see higher price increases than others. That includes electronics, appliances, apparel, and furniture — durable goods that have a large import share, MIT's Hornung said. Between February and June, the price of major appliances already increased by 5.7 percent, and furniture and bedding prices rose by 1.7 percent.
'That's different from what we're seeing in categories that are not particularly import-sensitive, like the service sector. You have to look closely, but you are really seeing a divergence now between tariff-sensitive and non–tariff-sensitive categories,' Hornung said.
Fruit and coffee are some staple items that have a large share of imports that could also see price increases.
By the time back-to-school shopping starts, Americans might start to notice the impact on their pocketbooks. Unlike big-ticket items, like cars, shoppers might not be able to put off purchases of smaller essentials.
'People don't put off shoe purchases for years and years and years,' Hornung said. 'That's an example of one where you'll both probably get the pricing effect, and you won't see slowing demand sufficient to offset any of it.'
Colyar said he's also watching tariffs on copper imports.
'Copper is in everything. It's in electronic components. It's fundamental to housing,' he said. 'It's an interesting bellwether for a pain point that people have very clearly communicated.'
Companies are biding their time, hoping that they can get a reprieve from tariffs in the next few months. But they're staring into a future where these kinds of changes become inevitable.