Tariffs and Their Impact on Inflation
The recent numbers from the June producer price index (PPI) have thrown a wrench in the arguments of those claiming that tariffs are driving up prices. The final demand price saw a tiny increase of 0.2% for the month. Meanwhile, core product prices rose by just 0.3%. This suggests that rather than widespread inflation, certain categories like communications equipment and manufacturing capital goods are influencing the numbers.
Critics of customs often downplay PPI data, pointing out that it doesn’t include imports. While that’s technically correct—PPI measures prices for goods produced in the US—many economists haven’t specifically warned against direct impacts from tariffs on imports. They maintain that tariffs actually influence the pricing of domestically made products.
The theory is straightforward: if imported components get pricier, manufacturers will turn to domestic inputs, affecting prices. This shift gives domestic companies more pricing power as they face less foreign competition, potentially leading to increased costs throughout the supply chain. Wall Street analysts cautioned that this would elevate domestic production costs and result in broader inflation, claiming that companies would exploit tariffs to boost prices even on products not subject to tariffs.
No Evidence of Tariff-Induced Inflation Upstream
If these projections hold true, we would expect to see a rise in domestic input prices, especially in sectors sensitive to tariffs. Surprisingly, however, steel mill products saw a decrease of 0.5%, while foundry and forge shop products dropped by 0.9% in June. These categories were anticipated to increase due to indirect tariff impacts. At the same time, interim demand for processed products remained unchanged, and intermediate demand for trade services dipped by 0.3%. This indicates that even when tariff-related costs exist, they seem to be absorbed upstream instead of being passed on to producers and consumers downstream.
Of course, you can always cherry-pick data from price indexes to support any narrative. For instance, UBS analysts pointed out that core products, when excluding autos, experienced the fastest monthly price hike in three years. This highlights how one can portray a significant inflation picture simply by excluding certain categories. Conversely, if home furniture is taken out of the equation, core prices rose by only 0.14%. Excluding electronics and computers kept core product prices flat.
Some critics continue to highlight isolated price increases as proof of inflation, but many, including the Economic Advisors Council, rightly underscore the difference between confusing inflation with relative price changes. While inflation exists, the larger trends remain stable. This is a point of strength for the US economy.
Notably, core product inflation is actually higher in countries like Mexico, Canada, and the UK, owing to their different trade policies. This implies that the recent price hikes might be part of a global trend rather than a spike caused by US tariffs. Since the pandemic began, core commodity inflation has outpaced that of the US in both Mexico and the UK, undermining the argument that US tariffs are independently driving domestic prices higher.
If tariffs were indeed the cause of rising producer prices, we would observe it in the PPI. However, the data doesn’t show this trend; core products are stable, input costs are either steady or decreasing, and businesses are not increasing prices through wholesale or retail markups.
This doesn’t mean that customs duties are without cost. The US government is raking in substantial revenue from tariffs, but this shows that prior warnings from scholars about inflation were overestimations. The inflationary effect of tariffs has been so minimal that it hasn’t significantly impacted prices set by US producers, indicating limited economic risk and possibly premature political concerns. Moreover, the Federal Reserve’s expectation of tariffs driving inflation higher appears to be the opposite of what’s actually happening.
There are indeed ways to challenge expert opinions based on actual data.
