Wall Street Cares About Inflation; Main Street Cares About Prices

I was just reading yet another article that argues that tariffs won’t cause inflation. And I had an “ah ha!” moment. Professionals talk about inflation, but most American consumers think in terms of prices, and those two are NOT the same.

Inflation is a measurement of the percentage increase in prices over a period of time. if prices went up 2% last year and another 2% this year, inflation last year was 2% and inflation this year is 2%. To professionals, Wall Street, that’s good news, inflation did not increase, it stayed the same. But on Main Street, prices are still going up every year. Wall Street is happy, but Main Street may not be. There is a disconnect in terminology.

The Wall Street argument about tariffs is that there might be a one-time “price shock” from tariffs, but they will have no long term affect on inflation. They are not saying that prices will go up and then return to normal, They are saying that prices will go up and then stay at that higher price as long as tariffs are in place. If tariffs go up more, there will be another, one time, price shock, and then prices will stay even higher afterward. If tariffs are reduced, or removed (we can only hope!), there would be a one-time price shock in the other direction.

The lived experience of Main Street will be less sanguine. Prices might go up pretty significantly with the imposition of tariffs, and prices will stay higher unless or until tariffs go down. Unless consumers have an equivalent upward “shock” in their wages, they are going to feel the effect of tariffs, and not just one time.

Another terminology disconnect is how Wall Street and Main Street think about the word “economy”. Is the economy doing well or badly? I listened to professionals talking about the economy before the election. It was fine, they didn’t know why voters seemed unhappy. They used inflation and employment statistics to explain how great the economy was, and assumed consumers were just getting bad information. If consumers had the right data, they would have known how great the economy was.

But on Main Street, the “economy” was less wonderful. Prices went way up after Covid and mostly stayed there. Some prices were even worse than others (egg prices up 60%). Even if the price of gasoline went down, you still had to pay for eggs and lots of other things that cost way more than they used to.

Employment statistics told professionals the economy was healthy, but on Main Street that might have meant working two jobs, or being stuck in the wrong job, or maybe working Uber or Door Dash was better than collecting unemployment.

To Wall Street, the economy is healthy if the data is good and if the big companies in the stock market are doing well. To Main Street, the economy is healthy if I have a good job and can pay my bills.

Back to tariffs. There is a debate about who will take the brunt of the cost of tariffs. It could be borne by the manufacturers in other countries, or by distributors, or by retailers. But it’s pretty likely that some, if not all, of that increased cost will end up as higher consumer prices. That may not cause lasting inflation, but it will hit Main Street hard. And if it does, it will also hit Main Street’s economy.