Prices rising due to tariffs isn't "inflation" in any traditional sense. It's not driven by consumer demand, and therefore the logic for raising rates (i.e. slowing economic growth by reducing money in the market) doesn't apply.
Yes, consumer prices rising is inflation in the traditional sense (since, unqualified, “inflation” refers to increases in consumer prices.)
> It's not driven by consumer demand,
Inflation is not restricted to demand-pull inflation, which is why the term “demand-pull inflation” has a reason to exist.
Tariff-driven price increases are a form of cost-push inflation.
> and therefore the logic for raising rates (i.e. slowing economic growth by reducing money in the market) doesn't apply.
The existence of cost-push inflation doesn't change the short-term marginal effects of monetary policy on prices, so of you care just about near-term price levels, the same monetary interventions make sense as for demand-pull inflation.
OTOH, beyond short-term price effects things are very different: demand-pull inflation frequently is a symptom of strong economic growth and cooling the economy can still be consistent with acceptable growth.
Cost-push inflation tends to be an effect of forces outside of monetary policy which tend to slow the economy, so throwing tight money policy on top of it accelerates the slowdown. This is particularly bad if you are already in a recession with cost-push inflation (stagflation).
The good thing, such as it is, about cost-push inflation where the cost driver is a clear policy like tariffs, is that while monetary policy has no good option to fix it, there is a very clear policy solution—stop the policy that is driving the problem.
The problem is when there is irrational attachment to that policy in the current government.
> so of you care just about near-term price levels, the same monetary interventions make sense as for demand-pull inflation....Cost-push inflation tends to be an effect of forces outside of monetary policy which tend to slow the economy, so throwing tight money policy on top of it accelerates the slowdown. This is particularly bad if you are already in a recession with cost-push inflation (stagflation).
Again, you're just saying the same thing that I wrote above, but arguing (?) that it's actually called "inflation".
If your point is that tariffs are bad, fine. We both agree that what you call "cost-push inflation" is not something you'd rationally raise interest rates to counter.
When the tariffs are dropped, do you think the price of the imported good is going to go back to the original price? If the domestically produced version is priced near the tariff price, they'll reprice slightly lower than the domestic price, ensuring prices stay high.
But in this case the price increase is already due to the government putting its thumb on the scale. The best way to reduce the price is not via the Rube Goldberg interest rate mechanism to shrink spending and thus demand for the $60 shoe, but by removing the tariff and make it a $30 shoe immediately.
They don't make policy and they go out of their way to not comment on policy. They say they are apolitical (though of course they are 100% pro-establishment).
If the entire government was working together, yeah, sure, your theory holds. But that isn't how things work.
If the purchase costs for a good suddenly increase, retailers will increase prices very quickly because they would otherwise start losing money very quickly.
If demand for goods decreases, that doesn't affect the retailer's cost of goods at all, and if they were to reduce their prices, they'd eliminate their thin margins. From their perspective, it's better to sit on inventory for a while.
So any downward pressure on prices would happen much more slowly.
BTW, this kind of asymmetry is why a bit of inflation is good, actually. Inflation acts as a universal and permanent downward pressure on (real) prices, in the sense that if retailers and others are unable to justify an increase in nominal prices to their customers, their real prices will drop.
But actually, tariffs have been 10-25% anyway for a number of years. So for existing products, some tariff cost was already included in that $7 total tariff cost. So, for existing products, the cost may go up ~$3.50 and our customer would sell it for ~$83.50 and the actual increase consumers would see is ~ 4.5% increase.
Now, this is a typical pricing scenario for our USA customers, they are selling individual products that cost $20 in China at volume, in USA at retail for ~3x-5x the per unit purchase cost from China, this is quite common. Now, the USA customer must buy ~5000pcs to get that $20 USD unit cost, while consumers get to buy only 1pcs and pay $87 USD, whether or not that is fair pricing given the risks and R&D costs, that's just the reality. Anyway, I'm not sure of the ex-works cost of shoes, but I'm highly confident big brands like Nike sell them for at least 5X the ex-works cost. So the math would be similar.
I'd expect the CPI to go up in the event of global tariffs at a baseline of 10% assuming all things go ahead as described.
(Note: a sibling comment suggests that it "doesn't matter", because if you slow the economy enough, you'll offset the artificial "inflation" due to tariffs. Maybe so. But that would be cutting off your arm to treat a paper cut.)
Disclaimer: I don't know anything about economics
But the acute cause is consumer demand. If the consumer reacted by not buying the tariffed stuff there would be no cause for alarm. But no, they continue to buy the higher priced goods. I'm not sure what happens next, but it seems if that is allowed to continue some sort of feedback loops develops leading to inflation getting out of control. We've seen that happen often enough, and the effects are devastating. So devastating governments use the interest rate hammer despite knowing it will likely get them thrown out of office, which is what happened to Biden.
The interest rates hikes (again for reasons I don't understand) effectively suppress demand. But it isn't necessarily demand for the tariffed goods, it's overall demand. Typically what you see drop is advertising, restaurants and similar discretionary spending. Notice they are services - not tariffed goods. This brings down spending to match income, and which somehow keeps inflation dragon in it's box.
In other words, the point of raising interest rates isn't to cure the tariffs. The only thing that can do that is to remove them. Instead it's to counter the effects of the tariffs - which is that they have made the economy less efficient, in the sense in the consumers can purchase less stuff with the money they have in their pocket. The consumers are in a very real sense poorer. The interest rates are just a hammer to ensure they act like they are poorer, and buy less stuff, and bring the economy back into balance. They react to being beaten with that hammer by voting out the party that chose to hit them with it. But it was for the own good, and so the political party deploying it has effectively decided to take one for the team. For all the cynicism our political systems and the politicians cop, I sometimes think they are undervalued. (But only sometimes, and only some of them.)
I suspect Trump is thinking "but the money hasn't been destroyed - I've now got it". And that's true. The effect of the tariffs is to divert trillions of dollars (by Trump's calculations) to the USA federal government. Before the citizens of the USA were free to spend that money as they see fit. Now they have handed over to Trump, and so have have effectively lost a freedom they once had.
If you look at other economies around the wold that have dragged themselves up by the bootstraps by imposing tariffs, like say China of Singapore, they poured that money into infrastructure, education and R&D. Maybe spending it in that way is perhaps more productive than letting Joe Sixpack using it to pay for takeout. I dunno.
Admittedly it's still an open question, but to me it seems the odds of Trump spending the money in that way is remote given he is currently cutting back on those very things. Perhaps even more telling is the USA go to be the most powerful economy on the planet by explicitly not letting government decide on where surplus money should be invested, but rather leaving that decision to it's capitalist economy. As it is, Trump is moving the USA from a capitalist economy to a command economy, with him in command.
Amazing stuff to see. I'm glad I'm watching from afar.
But these guys have basically said "we're all going to have to suffer, and then..." nothing! No huge capital investments into green energy. No workforce retraining. No infrastructure. Nothing. So yeah, you're asking me to sacrifice my quality of life? For what? Ew, no thanks!
Of course, I'm pretty confident I know where this money is going to go: contracts and grants to private corporations owned by Trump's personal network. They are already prepping for this by gutting huge swathes of the federal government. When they say "actually, we think some of these functions were necessary after all, but for efficiency reasons, it's best that private companies take over these functions..." naturally those contracts will go to the right people who are capable of making america great again.
It's actually insane, it has me absolutely livid about this whole situation. Sorry, I do not care how anyone feels about "the libs." These people are going to steal the quality of life -- that my parents built, that my grandparents fought a war to create -- from me and my children. They will use it to enrich themselves. They will burn the this country to the ground to accomplish this.
[0] https://www.politico.com/news/2025/02/12/elon-musk-doge-labo...
A lot of dollars are spent on US goods/services, so the baseline is more like 10% * proportion of dollars spent on non-US goods.
The fact that we decided allow a massive tax increase by executive fiat is irrelevant. The fact that we’re risking a death spiral from decreased consumer demand via government imposed inflation is irrelevant.
You’re right in that the usual formula of turning the knobs on interest rates to ease economic challenges is unlikely to work. We may have to turn the knobs to prevent a total death spiral, however. Get ready for 16% mortgages.
Oil price shocks in the 70s caused stagflation, a very real threat now.
The solution then was massive pain (Volker) that seemed to slay the beast.
Perhaps not in an academic sense, but the vast majority of people understand inflation as a rise in the cost of living, no matter the root cause.
At least if you care about avoiding hyperinflation.