The Trump economic team says that tariffs are a one-off price increase, and will not result in longer-term inflation. Are they right?
As I’ve noted before, tariffs don’t just impact imported goods; they provide an opportunity for domestic competitors to raise their prices in order to increase profits. In addition, it is unlikely that workers will suffer a loss in purchasing power without demanding higher wages. Third, there is no guarantee that any particular level of tariffs will remain stable, given Trump’s penchant for lashing out at anyone who displeases him. Finally, the public is more sensitive to inflation after the experience during the pandemic than it was a few years ago. Surveys indicate that inflation expectations are already high. As a result, the Trump team is probably wrong about the implications of the tariffs.
Of course, if the tariffs drive us into a recession, millions of unemployed workers will be in no position to demand higher wages. That’s the “optimistic” view of inflation.