Inflation has been surprisingly tame.
The Consumer Price Index rose by 2.7% year-over-year in June, the Bureau of Labor Statistics reported on Tuesday, in line with expectations give or take a basis point. The data was not alarming.
The index for all items less food and energy rose 0.2% in June, following a 0.1% increase in May. These numbers come on the heels of two months-worth of Section 232 tariffs on steel and aluminum, cars and parts, record high tariffs against China, and the 10% universal tariff imposed on all exporters.
Inflation rose in some tariffed areas, such as household furniture and clothing, but it equally rose in medical services (+0.6%) and electricity rates (+1%), two items that are not tariffed. Oddly enough, prices for new vehicles fell 0.3% yet again, the second month in a row, and this in spite of first-ever 25% global Section 232s. How is this possible?
“Tariffs are often blamed for inflation, but the evidence tells a more nuanced story,” said Mihir Torsekar, CPA’s senior economist. “Prices rise or fall for many reasons — from supply chain shifts and input costs, to consumer demand and inventory cycles. The fact that new vehicle prices fell despite 25% Section 232 tariffs shows how global firms often absorb costs, shift production to tariff-exempt zones, or engage in price smoothing to retain market share. Tariffs are just one variable to price — and clearly not the dominant one driving consumer prices today,” he said.
Food inflation increased 3% over last year. The U.S. food sector is increasingly import dependent, so there could be some tariff pass through here. Food commodities have not been exempt from the April 2 tariffs.
CNBC contributor Rick Santelli, a stalwart on the channel known for his old Wall Street trader vibes on the bond markets, said on Tuesday that the tariffs have “not been detrimental. Inflation is up, but some of that is associated with better economic data.” A stronger economy leads to more demand for goods and services, and that drives up prices.
“The death of the labor market (because of tariffs) has been greatly exaggerated,” Santelli said.
E.J. Antoni, a popular Heritage economist, said “the uptick in inflation does not appear to be from tariffs; import prices were flat month over month in May and preliminary data shows only a small increase for June.”
The big contributor was the usual suspect – energy prices, which spiked in part due to the tensions in Iran last month. “(This is) all the more reason why we need more domestic production,” Antoni said.
San Francisco Fed Economist Says Tariffs Will Cause Inflation, With a Huge Caveat
An economist with the San Francisco Federal Reserve wrote in their “Economic Letter” from July 14 that tariffs are going to lead to much higher inflation in the weeks ahead. There’s just one caveat, and senior economist Mauricio Ulate admits it up front in his analysis of the situation:
“It is too early to tell exactly what tariffs will be ultimately enacted, how long they will remain in place, and which level of retaliation — if any — other countries will settle on,” he wrote. “Thus, we simplify our model by assuming that the tariff increases will last for four years and that other countries will impose the same levels of tariff increases they face on imports of U.S. goods.”
To wit, no country outside of China has retaliated meaningfully against the new tariffs, imposed on April 2. When China retaliated, the U.S. retaliated in kind, sending tariffs to a near blockade level rate of around 145%. China’s exports to the U.S. fell to $20.4 billion in May, their lowest monthly value since February 2009. Other countries take heed.
Ulate also notes that their model finds the tariffs “lead to an increase in employment for the U.S. manufacturing sector.” He said that this would somehow come at the expense of employment in the services sector and in agriculture, as if suddenly people have lost the will to eat.
As a side note not mentioned in the report, the services sector, which includes high tech, has been shedding jobs in recent months due to the advent of artificial intelligence. Agriculture has been subject to import penetration and a shake up in immigration that could also lead to employment losses that, arguably, have nothing to do with tariffs.
The report is not the official inflation prediction of the San Francisco Fed. This is the analysis of one Fed economist.
“Most models of this sort assume a fixed level of employment and capital, which is highly unrealistic,” commented CPA chief economist emeritus Jeff Ferry. “The aim of the tariffs is to move people into higher-paid jobs in manufacturing and to get companies to add capital investment in manufacturing industries. If you assume the positive effects cannot happen, of course your model reflects only the negative effects. An economic model is only as good as its assumptions.”
Where Inflation is Rising
Inflation has been surprisingly tame.
The Consumer Price Index rose by 2.7% year-over-year in June, the Bureau of Labor Statistics reported on Tuesday, in line with expectations give or take a basis point. The data was not alarming.
The index for all items less food and energy rose 0.2% in June, following a 0.1% increase in May. These numbers come on the heels of two months-worth of Section 232 tariffs on steel and aluminum, cars and parts, record high tariffs against China, and the 10% universal tariff imposed on all exporters.
Inflation rose in some tariffed areas, such as household furniture and clothing, but it equally rose in medical services (+0.6%) and electricity rates (+1%), two items that are not tariffed. Oddly enough, prices for new vehicles fell 0.3% yet again, the second month in a row, and this in spite of first-ever 25% global Section 232s. How is this possible?
“Tariffs are often blamed for inflation, but the evidence tells a more nuanced story,” said Mihir Torsekar, CPA’s senior economist. “Prices rise or fall for many reasons — from supply chain shifts and input costs, to consumer demand and inventory cycles. The fact that new vehicle prices fell despite 25% Section 232 tariffs shows how global firms often absorb costs, shift production to tariff-exempt zones, or engage in price smoothing to retain market share. Tariffs are just one variable to price — and clearly not the dominant one driving consumer prices today,” he said.
Food inflation increased 3% over last year. The U.S. food sector is increasingly import dependent, so there could be some tariff pass through here. Food commodities have not been exempt from the April 2 tariffs.
CNBC contributor Rick Santelli, a stalwart on the channel known for his old Wall Street trader vibes on the bond markets, said on Tuesday that the tariffs have “not been detrimental. Inflation is up, but some of that is associated with better economic data.” A stronger economy leads to more demand for goods and services, and that drives up prices.
“The death of the labor market (because of tariffs) has been greatly exaggerated,” Santelli said.
E.J. Antoni, a popular Heritage economist, said “the uptick in inflation does not appear to be from tariffs; import prices were flat month over month in May and preliminary data shows only a small increase for June.”
The big contributor was the usual suspect – energy prices, which spiked in part due to the tensions in Iran last month. “(This is) all the more reason why we need more domestic production,” Antoni said.
The CPA Tariff Model: Another View
CPAs views on tariffs are now well known. Our economists use the Global Trade Analysis Project (GTAP) model, developed at Purdue University, to make their forecasts on tariff outcomes. GTAP can be modified by its users. CPA’s modified GTAP allows more flexibility in how the domestic economy responds to trade actions. The CPA modification adds two new relationships to the standard version of GTAP. The first allows domestic production to respond to greater demand for domestic goods by increasing capacity at existing factories, or reigniting old ones. The second allows the economy to increase investment and labor resources in response to this local demand for manufacturing and labor.
The CPA model says that a 10% global tariff would stimulate the U.S. economy to grow by nearly 3%, create nearly 3 million additional jobs, and raise real household incomes by close to 6% over a four- to six-year period.
Consumer prices rise by about half a percent per year over an anticipated six-year adjustment period, for a cumulative total of 3.26% as a result of the economic stimulus from the tariff package. This is a one-time price increase, as the increased demand for goods and services raises both output and prices.
Inflation risks remain. The 90-day pause on the April 2 tariffs ended on July 9 and the Trump administration did what it said it would do – simply tell countries they could not reach any trade agreements, and with that the 10% tariff would now be a bit higher. Nearly all of Southeast Asia is now faced with 20% minimum tariffs, with free trade agreements like the U.S. Korea Free Trade Agreement (KORUS) effectively dead.
Meanwhile, Ulate’s model suggests 31 states would gain real income, in some cases as much as 1.7%, while the remaining 19 states would lose, with some experiencing declines greater than 2% due to their exposure to imports.
“Economic modeling of trade needs to move on from today’s rigid free trade assumptions to a more general world where different policies affect different industries and different sections of the labor force differently,” CPA’s Ferry said. “The academic world needs to move away from free trade religion and understand that there are different ways of achieving balanced growth.”
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