Tariffs Will or Will Not Cause Inflation

Tariffs make prices go up. Tariffs may not cause inflation. Can both both those statements be true? What the heck will tariffs do to the economy?

I was forced to start thinking about tariffs when Trump became President. Even though he made no secret about his love for tariffs, I hoped or figured that he was talking about something like what he did in his first term, tariffs on China and maybe a couple other specifics like tariffs on steel. I know very few people who ever imagined he was going to suddenly announce huge tariffs on the whole world. But here we are.

Everyone will be touched by these tariffs in some way, and all of us have to plan how to adapt to them. One of the biggest questions is what will tariffs do to the economy? They might cause inflation or recession or stagflation or set the economy on fire. Those are wildly different results, and depending which is coming I have to plan for the future in wildly different ways.

The first question is, who is paying the tariffs? One thing I know for sure is that other countries are NOT paying the tariffs. The checks for tariffs being deposited into the US Treasury are signed by whoever imports goods into the United States, generally either US companies or US individuals. Companies in other countries may be losing business due to the tariffs, and perhaps in some cases they are reducing prices they charge their US customers, but they are definitely not writing checks to the US government. And it’s even more certain that tariff checks are not written by the Chinese government or other countries.

Given that, it seems logical that the price of the goods that are imported will have to be increased to offset the tariffs. And that increase logically might lead to inflation. But, so far at least, we haven’t seen rampant inflation. But it’s way too early to conclude that tariffs won’t result in consumer price increases.

We have some evidence that consumer prices haven’t gone up much, based on the latest Consumer Price Index (CPI) results. That report measure prices for a basket of consumer goods. The CPI is divided into several categories: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services. Each of those categories might be differently impacted by tariffs. Housing is a big component of the CPI, but it is calculated by looking at rents. Tariffs might increase the cost of building materials and supplies, but that won’t translate into higher rents immediately. Higher building costs will slowly impact the cost of new rentals, and only eventually bleed into the average cost of rent. Other things would be more immediately impacted, like the cost of imported food. Another thing thing that impacts the calculation of the CPI is an assumption about “substitutions”. If the cost of bananas goes up, the CPI assumes people will eat fewer bananas and switch to other foods. So the increased cost of bananas will never really be reflected in the index.

There is a different report called the Producer Price Index (PPI). That measures what is happening with the prices that manufacturers receive. You might think that would be the same as the CPI. Surely manufacturers receive what consumers pay. But the price that manufacturers receive is usually a wholesale price, not the final retail price. Goods may pass through several hands before they get to consumers. The July 2025 CPI report shows inflation at 2.7% while the July 2025 PPI report shows inflation at 3.3%. That may sound like a small difference, but it’s an indication that manufacturers are increasing prices but those increases aren’t being passed on to consumers. Yet.

Many experts agree that the difference in those reports is a strong indicator that companies have been eating the price increases. That is backed up by a stream of company financial reports showing that their earnings are under pressure. Most experts assume that many companies will be unable to continue to eat the increases, and that they will be forced to pass them on in the near future.

The CPI and PPI reports are only just beginning to reflect the higher costs of tariffs. Keep in mind that we just saw additional huge tariff increases in August 2025. And a another new tariff cost just hit yesterday, August 29, 2025, with the elimination of the “de minimis” tariff exception. Up until now, shipments under $800 were exempt from tariffs, but they no longer will be. This one will hit consumers and small businesses especially hard. There are estimates that there are 1.3 billion de minimis shipments every year, and that the new de minimis tariffs might amount to over $70 billion.

Putting that all together there is really no way to argue that prices won’t go up. So how is it possible that inflation might not go up? I have been reading up on various arguments about why that might actually be true.

The first argument that tariffs won’t affect inflation is that tariffs are “just” a one time price change. Inflation is measured as the percentage change of this year’s price to last year’s price. The year they go into effect there will be a big increase, the next year there will be no percentage increase. (altho the price will stay higher) This argument was mostly made at the time of Trump’s initial April 9, 2025 tariff announcement when it looked like tariffs would be a one-time event. It’s clear now that there won’t be one big price adjustment, and instead will be a constant stream of changes. If tariffs get locked in at some point and quit changing, the inflation rate will afterward be unchanged. This is an example of the confusion between prices and inflation. Prices will go up, but the inflation rate may not. I have to agree that if tariffs are set and left unchanged they will not technically affect the inflation rate. That doesn’t mean they won’t be felt or have an impact.

Another argument I have heard is that prices will go up, but people will quit buying imported goods and switch to other things. That assumes that there are other things to switch to that are less expensive that the imported goods. If everything that is tariffed has an alternative, the US-made alternatives will be bought. But they are probably already more expensive than the the imported goods we used to buy. And tariffs will allow US producers to increase their prices to just below the price of the import plus its tariff. So even if everyone switches to alternatives they will be spending more than they were before, and that will show up as inflation. As with the previous argument, you might say that there will be a one-time price increase when people make the switch, and thereafter there will be no inflation. But prices will be higher, and that will have an impact.

A third argument about why tariffs won’t cause inflation is that prices will go up and people will just have to pay higher prices. Then they’ll quit buying other things because they won’t be able to. That will take other prices down, offsetting the higher prices of tariffed items. This argument is a doozy. It certainly could happen, but calling this an economic success is a real stretch.

A fourth argument about why there won’t be inflation is the most depressing, but probably fairly likely. That argument is that prices will go up and people will just have to pay them, then they’ll quit buying other things and the economy will go into a recession from all the pressure. So there won’t be inflation because we will be in recession.

I spent some time studying “A User’s Guide to Restructuring the Global Trading System”, the paper by Steven Miran where he sets out his proposal for using tariffs to bring production back to the US. That paper forms a basis for much of Trump’s tariff policies. Miran says that tariffs have minimal inflation impacts and will ultimately be borne by the tariffed country because their purchasing power and wealth will decline. Miran recommended adding tariffs gradually, not all at once, which is not at all what happened. His argument for why tariffs won’t impact inflation is that the dollar will become stronger, and that will offset inflation. But what actually has happened so far is that the dollar has become much weaker. So the path to avoiding inflation Miran laid out is not at all the path we have gone down. Based on that paper, we might be headed for inflation after all.

Finally there are Trump’s statements. Forget inflation, he clearly believes tariffs will lead to a booming economy. That scenario assumes that production of everything will return to the US. We will build everything here and buy almost everything from American companies, and Americans will all have great jobs producing all the things that they buy. Even he knows that couldn’t happen instantly, so he has admitted there might be a “little pain” between here and there.

Building a manufacturing plant is a big project, and it takes years to make plans, purchase property, build and/or rehab it, and then finally start production. The plants that get built will be highly automated, so they won’t employ as many people as the old car plants in Detroit in the Fifties and Sixties employed. And whatever employment there is will not be until several years in the future. What happens in the meantime? People will have to pay higher prices until US alternatives are available, and that sounds like inflation. And the eventual US alternatives will be built in expensive new plants and probably not be cheap either.

So there are arguments to be made that tariffs won’t cause inflation, but nearly every argument acknowledges that tariffs will increase prices.

We just had an interesting development in the tariff story. Yesterday, August 29, 2025, a federal appeals court ruled that Trump can’t use emergency powers to unilaterally enact tariffs. He will certainly appeal that to the Supreme Court, so nothing will change until then. If the Supreme Court agrees, that will be a game changer. Unwinding the tariffs could be just as disruptive to the economy as the tariffs have been. But unwinding tariffs will definitely not be inflationary. Hopefully the case will get to the Supreme Court quickly. The current uncertainty is not good for the economy.

Photo by Pat Whelen on Unsplash