Comment by timr
7 days ago
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.
> Prices rising due to tariffs isn't "inflation" in any traditional sense.
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.
You're just using new terms ("cost-push inflation") to disagree without actually disagreeing.
> 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.
Increasing cost of imported goods will increase demand on equivalent domestically produced goods, which are also often supply constrained. Locally produced goods will increase their prices as much as the market allows (which is somewhere around the cost of the imported good with the tariff). Tariffs cause inflation as a whole.
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.
If a pair of shoes today costs $30, and a pair of shoes tomorrow costs $60 (not saying this will happen, just positing a scenario), from a consumer perspective, there has been 100% inflation in the price of shoes. It doesn't matter that the price increase is due to tarrifs on imports from Vietnam.
I'm an American that owns/operates a design and manufacturing company -- we build customer products in China and export to USA buyers. Let's say we build the customer product and sell it to them for $20 ex-works China. That means USA customer must pick it up at our dock and pay the shipping fee. Lets ignore the shipping fee to keep it simple. Assume USA customer currently sells the product for $80 in USA. If USA customer now needs to pay 35% import tariffs on $20/unit, then their cost goes up $7 USD. If USA customer passes 100% of that cost to their own final end customer, then they need to start selling it for $87 USD. So 35% tariff ultimately turns into a price increase of 8.75% for consumers.
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.
From what I've seen (briefly worked at a logistics company and would see companies POs), apparels seem to be more in the 5x to 10 range.
If you're directly passing the tariff increase along, without markup, are you comfortable reporting to your stock holders a decrease in margin?
Yes and there will be the usual political consequences associated with inflation; but this type of inflation is caused by a tax and cannot be combated by raising interest rates.
It most certainly can, though you would have to push interest rates much higher than normal to kill demand enough to have an effect.
Why wouldn't a rate hike make a difference? It will lower demand and therefore prices, no? I mean, this isn't really something that we should celebrate or want, since it essentially just means discouraging people from buying shoes because they can't afford it, but it does bring the prices down (or at least slow the rate of shoe price increase).
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This is blatantly false. You just have to look at Jerome Powell's reasoning in 2018-2019 and just last month!
It's only inflation if you also double your earnings (tongue in cheek, this takes obviously place on a macro scale). This is about balancing costs. Globalization created environmental externalities that are not sustainable. While you enjoy the $30 pair of shoes, the people by the factories suffer. Almost nobody importing goods is really checking the supply chains properly enough. We have pretty strict EPA laws here that are a tariff in their own way.
But the Fed is not the consumer
But (as I understand it) how the Fed tracks inflation is the consumer price index, which does take things like "the price of shoes" into account.
If the consumer price index, which is a metric the Fed uses, goes up, then inflation has gone up. Every dollar buys you less (less purchasing power), and the nominal price has increased. To me this indicates inflation. Of course, you need to calculate how this balances out in terms of jobs/wages and the flow of investment, but that's really hard to figure out at this point in time.
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.
Yes, that's fine. But if the acute cause is not consumer demand, raising interest rates won't do anything.
(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.)
Inflation is just a description of price movement, nothing more.
Doesn't expectation of inflation increase consumer demand? If I like apples and expect that tomorrow they'll cost more, I may buy more apples today?
Disclaimer: I don't know anything about economics
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calling 50% tarrifs on all of easy Asia is hardly a paper cut. it's more breaking someone's ribs while giving them CPR
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> But if the acute cause is not consumer demand
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.
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One way around this might be a twist on Goodhart’s Law: if you come after the people at BLS who produce the CPI [0], and replace them with political appointees, then maybe you can arrive at an “improved” CPI that hews more closely to your political desires. Assuming you’re the kind of leader who privileges optics over high-fidelity data.
[0] https://www.politico.com/news/2025/02/12/elon-musk-doge-labo...
> 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.
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.
Inflation is inflation.
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.
It doesn't matter what the root cause of increasing prices is. Fed doesn't have any other levers but to adjust rates up to reduce demand. It will work either way because even if demand is not the source, it will reduce whatever demand that was there.
That's a distinction without a difference.
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.
>> rising due to tariffs isn't "inflation" in any traditional sense.
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.
Yes, but the point being made above is about the reaction of the bond market vis a vis refinancing the debt, not consumers.
You can’t isolate these things, the Fed’s charter is to try and reduce inflation for consumers not regulate the bond market for the US debt, but their interest rates and repo actions move the bond market.
Actually, price increases caused by tariffs are a type of inflation—specifically, cost-push inflation. This is consistent with standard definitions found in macroeconomics and international economics textbooks.
Inflation is definitely going to happen due to tariffs. If I'm paying 20% more next year on average for products above what I'm currently paying that is 20% inflation for me, that is what people will see; they don't care about your purist form of inflation arguments. They also vote against people who cause inflation, especially when they promised the opposite.
Didn't stop the Fed last time, when inflation was due to market control letting companies pick their own price (also not "real" inflation).
It doesn't matter what causes inflation. It's always a sign that there's more money than is needed for current and anticipated levels of economic activity. And the correct course of action is always to raise the rates to reduce the pace that the money is printed at.
At least if you care about avoiding hyperinflation.
There's nothing in the definition of inflation that says it needs to be driven by consumer demand.
Coupled with tax cuts?