Tariffs Won't Increase Inflation, But They Will Be Blamed

Unfortunately, in American society, we have a penchant for pointing the finger at the wrong people—or in this case, the wrong policies. Right now, the financial media is running headline after headline about the potential for tariffs to reignite inflation. Inflation may indeed pick back up, but if it does, tariffs will be falsely accused.

Now, don’t get me wrong—while I believe many policy proposals coming out of the new administration are pro-growth, including tax cuts, deregulation, and a focus on greater government efficiency, I am no fan of tariffs from an economic standpoint. There may be a political argument for tariffs as a negotiation tactic, but as an economist and wealth advisor, I focus strictly on how they impact the economy and investor portfolio.

From my research, I cannot find historical precedent that suggests tariffs cause anything more than a negligible increase in consumer prices. Recent papers from the Boston Federal Reserve and the Congressional Budget Office (CBO) predict that tariffs may contribute to inflation, but any impact will be small, one-time increases spread over multiple years.

According to the Boston Federal Reserve,

“We estimate that an additional 25 percent tariff on goods from Canada and Mexico, combined with an additional 10 percent tariff on goods from China, could add as much as 0.8 percentage points to core (excluding food and energy) inflation.”

Keep in mind, this is a one-time increase that would likely take years to materialize.

Similarly, the CBO found that:

“A uniform increase in tariffs of 10 percent of the value of goods would increase the level of the PCE price index by roughly 0.6 percent.”

Now, compare that with the CPI’s cumulative increase of 21.4% from January 2021 through January 2025, driven by trillions of dollars injected into the system by the Federal Reserve and Congress. This equates to an average annual CPI increase of over 5.35%—3.35% above the Fed’s 2% inflation target, leading to a total excess inflation of 13.4% above target over the last four years.

Why CPI, Not Core PCE?

As an aside, I reference CPI instead of Core PCE (which excludes food and energy prices) because monetary and fiscal policy absolutely impacted overall price inflation. Excluding food and energy underestimates the impact of monetary and fiscal stimulus, giving an incomplete picture of inflationary pressures.

While I can’t pinpoint the exact impact of monetary and fiscal stimulus, it’s fair to assume these measures pushed inflation up by double digits over the last four years. This properly contextualizes the marginal impact of trade policy on consumer prices and reinforces Milton Friedman’s famous quote:

“Inflation is always and everywhere a monetary phenomenon.”

How Tariffs Will Affect Specific Goods

While the broad inflationary impact of tariffs will be limited, certain goods will see disproportionate price increases. For example, auto prices are likely to rise due to steel tariffs, which the Trump administration is already implementing. There will be targeted inflation for specific goods, but a widespread increase in consumer prices will again be marginal.

Will Tariffs Derail the Fed’s Rate Cuts?

The big fear surrounding inflation is that it could stall the Fed’s efforts to lower interest rates. Some are even suggesting that tariffs could force the Fed to hike rates again, potentially triggering a market selloff.

While I don’t think it’s entirely impossible that the Fed could raise rates again, if it happens, it won’t be because of tariffs. Any further tightening will be a continued consequence of excessive fiscal and monetary policy still working its way through the system.

But Make No Mistake—Tariffs Will Be Blamed

The media and many policymakers will point to tariffs as the culprit for rising inflation, higher rates, or market volatility. But in reality, monetary and fiscal excess remain the real drivers.

Tariffs may not be great policy, but they are not the inflationary boogeyman they’ll be made out to be.

Disclosures:
Any opinions are those of Drew Benson and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.