Tallying Up Tariffs: The Effect on Inflation

Executive Summary

Trade tensions have been escalating since the spring when President Trump announced tariffs on steel and aluminum imports. Tit-for-tat responses to the initial tariffs levied by the administration earlier this year are beginning to add up. Supply chain managers have been left scrambling to find new sources of materials or face higher costs.

As shown in Figure 1, effective tariffs on U.S. imports have fallen substantially since the mid-1980s. While there is still tremendous uncertainty surrounding the size, targets and duration of tariffs under the current administration’s trade policy, it is clear that rates are at least no longer declining. We estimate that the measures already imposed would increase CPI inflation by a scant 0.1 percentage point. If all the additional tariffs being proposed were to go into effect, however, inflation would rise about 0.5 percentage points.

Keeping the effect on consumer price inflation thus far fairly modest, and limiting the impact if additional tariffs go into effect, are the composition and knock-on effects. The tariffs that have already gone into effect have focused on intermediate goods, meaning they equate to only a portion of the production cost. In addition, tariffs have been aimed at goods rather than services, and goods account for only about one-third of consumer spending (Figure 2). Consumers are also likely to adjust by buying goods from producers not covered by tariffs and/or reducing consumption of goods targeted. Second-order effects, such as retaliatory measures, a stronger dollar and weaker real growth also stand to mitigate the initial inflationary impulse of U.S. tariffs.

Overall, effects of tariffs that have already been enacted should be small enough to where the Fed does not need to alter its current course of policy on the basis of inflation. The additional proposed measures, however, stand to push inflation noticeably higher and weigh more meaningfully on real consumer spending.

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