Comment by dragonwriter
15 days ago
> 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.