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American Focus > Blog > Economy > Tariffs and Inflation – Econlib
Economy

Tariffs and Inflation – Econlib

Last updated: March 21, 2025 2:19 pm
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Tariffs and Inflation – Econlib
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As I pen this analysis, a deluge of commentary is flooding the digital landscape regarding the inflationary effects of Trump’s recent tariffs on Mexico, Canada, and China—our three largest trading allies. These nations account for a significant share of imports across various sectors, directly impacting both American consumers and businesses. While concerns about rising prices are valid, it’s crucial to distinguish between a temporary price spike and sustained inflation. Tariffs tend to induce a one-off increase in costs; however, once the dust settles, prices typically stabilize. A prime illustration of this can be found in the 2018 tariffs on washing machines.

In 2018, President Trump initiated tariffs on washing machines, which inevitably led to an immediate price surge, reflected in both consumer prices (as per the Consumer Price Index) and producer prices (as indicated by the Producer Price Index). The full weight of the tariff was absorbed by American consumers. Yet, after this initial leap, prices reverted to their long-term trajectory of gradual decline. Tariffs did not instigate a persistent rise in prices; rather, they caused a temporary shock, after which market dynamics reasserted themselves, leading to a return to previous trends. This is the expected economic behavior: tariffs shift price curves upward momentarily, but once the initial shock dissipates, the long-term trends prevail.

Here’s a chart I created based on the Consumer Price Index for Washing Equipment (source: Bureau of Labor Statistics, series ID: CUSR0000SS30021):

Observe that from 2013 onwards, the prices of washing machines had been on a downward trend, a pattern that persisted until the tariffs were enacted in 2018. Following the tariff imposition, prices surged. However, by the end of 2018, once the tariffs were fully integrated into the pricing, the downward trend resumed. Fast forward to 2020, and the landscape changed again as inflationary pressures emerged, reversing the previous trend. This chart clearly illustrates that while tariffs may have nudged prices higher, they did not dismantle the overarching tendency for prices to fall. Consumers experienced lower prices than they might have without the tariffs, but still higher than they would have been in a tariff-free environment.

See also  EU-US trade talks to go ahead despite court blow to Donald Trump’s tariffs

Looking ahead to 2025, we can anticipate that these new, widespread tariffs will likely lead to a short-term price increase. Given their extensive application, the resulting cost hikes for both consumers and producers may indeed show up in temporary inflation metrics. However, labeling these tariffs as inflationary would be misguided. They are incidental to the broader inflationary landscape, with the Federal Reserve’s excessively inflated balance sheet being the main architect of inflationary trends.

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