Here's How Low Inflation Would Be Without Trump’s Tariffs, According to New Research
It’s well established that increased tariffs lead to short-term price hikes on certain goods for consumers. But the complexities involved with international trade have made it difficult to pin down exactly how tariffs change the U.S. inflation rate.
At last, researchers at the National Bureau of Economic Research, or NBER, have come up with an answer. Since President Donald Trump announced broad tariff measures starting in the spring, the import taxes have increased the inflation rate by 0.7 percentage points between March and August, as analyzed in an NBER paper published Monday.
The annual inflation rate for August — which was 2.9% — would have been 2.2% without tariffs, the researchers said, putting the U.S. “much closer to the Federal Reserve’s inflation target” of 2%. Instead, the costs for all sorts of everyday items, including goods produced domestically, have gone in the opposite direction due to tariffs.
“Prices began rising immediately after the broader tariff measures announced in early March and continued to increase gradually over subsequent months,” the researchers said.
Labor Department data shows that inflation had been cooling for several consecutive months at the start of the year before Trump implemented broad tariffs.
The NBER researchers were able to quantify the exact impact of tariffs on inflation levels by matching daily retailer prices to specific products and countries subject to the new tariffs. ”Our results show that tariff costs were gradually but steadily transmitted to U.S. consumers,” they said.
While tariffs of between 10% and 50% are still in effect, the cornerstone of Trump's economic policy faces an uncertain future. The Supreme Court is currently deciding whether the president has unilateral authority to impose tariffs. A ruling is expected in June or July.
How tariffs affect inflation
Tariffs are import taxes set on certain goods that come from other countries. However, the tax isn’t paid directly by the country the goods are coming from. Instead, it is paid by U.S. businesses that import the goods and distribute them throughout the U.S.
In the NBER analysis, the average tariff rates for imported goods were about 20%. The U.S. businesses that face this tax hike have a few options: They could eat the cost and keep prices for consumers the same — but lose revenue. They could hike their prices by about 20% to fully offset the tariffs. Or they could raise prices modestly and take a slight hit to revenue.
Research shows the last option is usually what happens. Before making its way to the consumer at the checkout counter, an imported item might pass through several businesses, and each one might tack on a higher price. The result for a consumer may be noticeably higher costs for specific items.
Data from the Harvard Business School Pricing Lab, which was involved in the NBER study, illustrates how tariffs have increased the prices of imported goods. For example, the largest price increases hit carpets (50%), clothing (13%), glassware and tableware (11%), as well as coffee and tea (6%).
Some goods that escaped tariffs directly still rose in price as well. Even U.S.-made carpets surged in price by 36% over the same period of time. Of all the goods the HBS Pricing Lab tracked — both domestic and imported — costs rose 3.7% total.
Of course, not everyone is buying carpets and tableware right now, highlighting the importance of the role tariffs play on the overall inflation rate, which aims to be a snapshot of everything a typical American buys. While a 0.7 percentage point increase in the inflation rate might not sound like much, it weighs heavily on already-strained budgets.
“All Americans are going to be impacted by this,” Ernie Tedeschi, the director of economics at Yale’s Budget Lab, previously told Money. According to Budget Lab research, tariffs represent an income loss of $1,700 for the average U.S. household.
“In a trade war,” Tedeschi said, “there’s no place to run, no place to hide.”
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