The Atlanta Fed GDP Nowcast for Personal Consumption Expenditure sits at 1.5%. Tack on an expected 2.5% for core nominal inflation, and that’s 4% nominal – the second consecutive quarter at that rate of total dollar spending increases in the economy. That number is below the nearly 6% in total dollar spending over the last two years, suggesting that the economy is cooling. This is why Trump, and the bond market, are calling for interest rate cuts. Fed Chairman Jerome Powell thinks tariffs will increase prices and so has opted to hold rates steady.
“One way to know economists do not actually believe that tariffs are inflationary is to note that they would never warn that a carbon tax is inflationary,” writes Oren Cass in his Understanding America stack on July 15. Cass is founder and chief economist for American Compass. “Nor do they ever warn that any increase in any tax is inflationary. Because it’s not. If you tell an economist in the abstract that you are concerned about our huge budget deficit and want to raise a tax to narrow it, and ask whether that is likely to be inflationary or deflationary, they will either say it has no effect or that it should exert downward pressure.”
Inside the Fed, Waller thinks tariff costs will only have a limited impact on consumers.
His baseline assumption is a slow down in the rollout of new tariffs, with multiple postponements for negotiations likely. He could be wrong on that one. The Trump administration is rolling out numerous Section 232 investigations that could very easily lead to 25% tariffs and import quotas. But if he is correct, changes in rates or timelines to the ‘Liberation Day’ tariffs may buy importers time to swap imports from high tariff nations to low tariff nations, or when plausible, source locally, he said.
Another reason for the limited impact on prices: “Faced with a slowing economy…and the likelihood that tariffs will be weighing on consumer spending, foreign producers and importers may be finding ways to hold the line on prices to maintain their presence on store shelves and hold on to customers,” Waller said. “In fact, slowing demand increases competition for all firms, and consumers may benefit.”
CPA has often highlighted that tariffs are not the main drivers of inflation.
In March 2023, an International Trade Commission report on the effects of Section 232 steel and Section 301 China tariffs estimated those tariffs raised the cost of imports by no more than 2% due to some of the reasons cited by Waller – the importer takes a cut off its margin, as does the exporter. Currency fluctuations are another reason, not cited by Waller, however.
“We are likely to see some price increases in some sectors this year, like toys, but in most consumer goods, competition will hold down price increases and the net effect on the rate of consumer inflation is likely to be less than one point,” said Ferry.
Fed Governor Chris Waller Takes CPA’s Long View on Tariffs
At best, tariffs will be a one-off price increase, as opposed to an annual hike. Economists know this. Those who say otherwise are being political.
CPA’s economics team, led by Chief Economist Emeritus Jeff Ferry, has been beating the drum on tariffs and inflation for years. And now we have someone from the Fed agreeing with him—and with CPA—on the matter.
On July 17, at an event at New York University, a member of the Federal Reserve Board of Governors, Christopher Waller, said that tariffs are not inflationary. “Tariffs are one-off increases in the price level and do not cause inflation beyond a temporary surge,” he said.
The take from those who are vehemently opposed to the Trump administration’s America First trade policy is that tariffs are a tax on the middle class. To them, if inflation has been tame since that infamous Liberation Day of April 2, just wait until August 1 when the 20%-plus tariff levels kick in. (Those tariffs are under review by the U.S. Federal Appeals Court.)
As far as inflation goes, one of the most interesting examples of the tariff-inflation disconnect has been with new car prices. According to the Bureau of Labor Statistics (BLS), new car prices fell 0.3% in May, and another 0.3% in June. This happened during the first-ever global Section 232 tariffs on cars and car parts. Sure, Mexican made cars are allowed into the country duty-free if they meet the required conditions of local content. But even with those conditions, new car prices have risen before. Why not now when you have 25% tariffs? One reason could be Ford’s decision to offer new car buyers their employee discounted rate. They would probably undercut sales of rival pick-up trucks and sport utility vehicles if that competition raised prices.
Waller said he uses BLS data and tracks the short-run price impact of tariffs on goods prices in real time by examining product-level price data from online stores of large U.S. retailers. Despite tariffs on imported apparel and beach towels, those summer sales have persisted.
Using data through mid-July, overall imported goods prices increased modestly but domestic goods prices are little changed.
“Looking across country of origin, Chinese goods imports have seen the most persistent and steady price increases,” Waller said. This makes sense. Keep in mind that China tariffs faced record breaking highs upwards of 145% in April and into May. Now those tariffs have been cut in half. For now, “the data points to very small goods price increases relative to the size of the tariff rates,” Waller said.
The Atlanta Fed GDP Nowcast for Personal Consumption Expenditure sits at 1.5%. Tack on an expected 2.5% for core nominal inflation, and that’s 4% nominal – the second consecutive quarter at that rate of total dollar spending increases in the economy. That number is below the nearly 6% in total dollar spending over the last two years, suggesting that the economy is cooling. This is why Trump, and the bond market, are calling for interest rate cuts. Fed Chairman Jerome Powell thinks tariffs will increase prices and so has opted to hold rates steady.
“One way to know economists do not actually believe that tariffs are inflationary is to note that they would never warn that a carbon tax is inflationary,” writes Oren Cass in his Understanding America stack on July 15. Cass is founder and chief economist for American Compass. “Nor do they ever warn that any increase in any tax is inflationary. Because it’s not. If you tell an economist in the abstract that you are concerned about our huge budget deficit and want to raise a tax to narrow it, and ask whether that is likely to be inflationary or deflationary, they will either say it has no effect or that it should exert downward pressure.”
Inside the Fed, Waller thinks tariff costs will only have a limited impact on consumers.
His baseline assumption is a slow down in the rollout of new tariffs, with multiple postponements for negotiations likely. He could be wrong on that one. The Trump administration is rolling out numerous Section 232 investigations that could very easily lead to 25% tariffs and import quotas. But if he is correct, changes in rates or timelines to the ‘Liberation Day’ tariffs may buy importers time to swap imports from high tariff nations to low tariff nations, or when plausible, source locally, he said.
Another reason for the limited impact on prices: “Faced with a slowing economy…and the likelihood that tariffs will be weighing on consumer spending, foreign producers and importers may be finding ways to hold the line on prices to maintain their presence on store shelves and hold on to customers,” Waller said. “In fact, slowing demand increases competition for all firms, and consumers may benefit.”
CPA has often highlighted that tariffs are not the main drivers of inflation.
In March 2023, an International Trade Commission report on the effects of Section 232 steel and Section 301 China tariffs estimated those tariffs raised the cost of imports by no more than 2% due to some of the reasons cited by Waller – the importer takes a cut off its margin, as does the exporter. Currency fluctuations are another reason, not cited by Waller, however.
“We are likely to see some price increases in some sectors this year, like toys, but in most consumer goods, competition will hold down price increases and the net effect on the rate of consumer inflation is likely to be less than one point,” said Ferry.
SUBSCRIBE TO JEFF FERRY'S SUBSTACK, THE GROWTH IMPERATIVE
“The main driver of the inflation rate is fiscal and monetary policy and the general level of consumer demand in the economy,” Ferry said. “Monetary policy is slightly tighter than neutral right now and as Waller pointed out, the overall level of demand is slightly sluggish, in the 1% range.”
Economists have long argued that the United States and Europe benefit from cheaper goods from developing countries — that these imports reduce prices and costs for consumers so they can buy more stuff. This default view on the economy calls for continually opening the United States to more imports. The result is record-breaking trade deficits of more than a trillion dollars over the last three years. The roughly $4 billion worth of imports have not delivered on the promises of substantially lower consumer prices. The U.S. is a net food importer, yet everyone complains today about the price of beef, an item in which the U.S. now runs regular monthly trade deficits.
“Despite the claims of wild price hikes from tariff critics, the Federal Reserve thinks Trump’s most substantial tariffs would only minimally affect inflation,” CPA economist Andrew Rechenberg noted back in March. “Any small price increases would likely be spread over several years and further mitigated by increased domestic U.S. production,” he said.
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