Trump’s tariffs have resulted in an inflation paradox
Much like the dog that didn’t bark in The Adventure of Silver Blaze by British crime writer and creator of Sherlock Holmes, Arthur Conan Doyle, one of the biggest puzzles after US President Donald Trump’s 2 April edict of a 10% tariff on all imports is its remarkably subdued effect on inflation in America.
At first, the general consensus—not limited to doomsayers—was that growth would fall and inflation rise as a direct outcome. Stagflation, or slower growth amid higher inflation, was the broad prognosis for the US economy and thence for the rest of the world’s economies.
So far, what we have seen instead is a slowdown for sure—US output contracted 0.5% in the first quarter of 2025—but barely a blip on the price front. How come? It calls for a closer look at the economic dynamics at play.
Also Read: Doom loop: Stagflation is the best scenario a tariff-hit US can expect
True, Trump’s more threatening country-specific ‘reciprocal’ tariffs that were to go into effect on 9 April were held off for 90 days, which have just ended, and the latest tariffs notified by letters sent to 14 countries will be enforced only from 1 August. In other words, we “ain’t seen nothin’ yet,” as Americans are given to say.
Even so, the largely missing knock-on effect of a baseline tariff on prices in an economy that imports so much of what it guzzles is not easy to ‘puzzle out,’ a verb popularized by an earlier US president, Barack Obama. The US now has the highest average tariff since the 1930s, thanks to Trump’s novel approach to trade. Add to that the dollar’s big drop. The dollar index has fallen by close to 11% since the beginning of this year, making it the worst first-half for the US currency in almost half a century. Together, both should have pushed up retail prices.
Yet, US data shows that its consumer price index rose just 0.1% month-on-month in May 2025. And though its annual inflation at 2.4% is above the Fed’s 2% goal, a New York Federal Reserve survey released in early July sprang a surprise: earlier fears that Trump’s tariffs would result in a price spike have all but disappeared. Inflation expectations are back to pre-tariff levels.
Also Read: US economy: Is stagflation making a comeback amid Trump turbulence?
What explains this?
One reason could be that importing companies had front-loaded their imports and piled up inventory in a bid to beat the tariff deadline. This is borne out by trade data as well.
A second is that many companies chose to absorb the extra paid for imports and let margins take a hit, rather than raise retail price tags. A third is that demand driven lower by uncertainty softened the price impact, as seen in the global oil market.
A fourth, one that finds favour with Fed Chair Jerome Powell, is that although tariffs do result in a one-off price jump—one that businesses appear to have ‘eaten’ for now—it’s too early to say with any confidence whether this will steepen the angle at which prices rise over longer spans of time.
Also Read: Dear Trump… Nobody can glower American interest rates down
In his most recent testimony to the US Congress, Powell had said the “outlook is for higher inflation over the year,” a hint that he saw this as just a lull before the storm. The summer of heating prices he anticipated may not be showing up, but some of the factors behind today’s calm could come apart, while others are unreliable.
The US still risks price instability worse than what Trump might expect if his August tariffs kick in. We’re in mid-summer now and the inflation dog is yet to bark. But that could be because it was lulled asleep by peculiar factors. The basic laws of economics haven’t broken down. Yet.
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