For months, many, most, if not all economists have been predicting a re-inflation due to the tariffs imposed by the Trump administration. They are not small increases but dramatic increases that shattered a 70-year postwar run of low tariffs. Every bit of economic theory would suggest that the new taxes paid on imports by American businesses and consumers would feed into price increases.
Those price increases keep not happening.
The consumer price index (CPI) and producer price index (PPI) data came out last week. They once again underscored the point. Inflation is not dead but it has hit new lows relative to what we’ve been through for four years. Tariffs seem not to have made any difference at all. …
Economics is excellent at making qualitative predictions. This amounts to observing that X will cause Y provided that Z remains constant. That is true so far as it goes. But Z is never constant. For that reason, economics cannot make quantitative predictions with any degree of reliability. …
To be sure, the economists are quantitatively correct. Tariffs raise prices in some area and for some group but it is not entirely predictable precisely who that will be. So far it appears not to be consumers.
There is also a point to make here concerning inflation and its definition. A new tax can raise prices but that is not the same as inflation, which, as Milton Friedman never tired of saying and proving, is always and everywhere a monetary phenomenon. Higher inflation means the depreciation of the currency, not merely an increase in the price of particular goods and services.
I’m not a fan of tariffs but let’s please stay objective about the empirical case: there is no evidence yet that Trump’s tariffs have increased prices. They appear, so far, to be eaten mostly by importers and not passed on or perhaps they are absorbed by exporters themselves who had high enough margins to pay the tariffs in the form of lower prices to make up the difference of higher fees to importers.
We don’t have enough empirical data to explain it all just yet. Still, if we are keeping score here, the economists who predicted impending doom by the end of low tariffs are not on the winning side. So far. And there is a lesson here: maybe economists could use a dose of humility.
Yes, it is an anomaly that there has been no tariff inflation! Someone is paying for the privilege of these tariffs and it seems not to be the consumer, so far, as predicted by current economic theory. I have no speculation on who may be paying the tariffs, but it may be the producers. The author is right about the economists being wrong, it is based in the premises that the mainstream economists use in their calculations. They forgot that humans choose and that choice is totally unpredictable to anyone but themselves. When will we and the main stream economists learn to understand human action?