Liberation Day Tariffs: A Requiem for a Failed Theory
The inflation advocates had a straightforward belief: Tariffs lead to increased prices. Importers would inevitably shift those costs onto consumers. Additionally, domestic manufacturers, sheltered from international competition, would also elevate their prices. Democrats went so far as to label the tariff a “national sales tax.”
Recent data from the Consumer Price Index (CPI) and Producer Price Index (PPI) for February, just ahead of the Supreme Court’s decision on IEEPA, suggested a different scenario: The Liberation Day customs system was abolished. It appears that their predictions didn’t quite come true.
Looking first at the CPI, the overall index climbed by 2.4% from one year ago, staying consistent with January’s figures. Core inflation, excluding food and energy, remained steady at 2.5%. When comparing to the previous month, core goods saw a modest increase of only 0.1%. Year-over-year, core products only grew by 1%. These figures don’t indicate an economy bracing for substantial tariff-induced shocks.
Consider particularly those areas where cost increases, due to tariffs, would be most noticeable. Sales of new cars, among imported goods with significant tariffs, were stagnant, unchanging from the previous month and showing just a 0.5% rise over the year. Toy prices, which have garnered media attention, actually dropped by 1.3% in the past year. TV prices dipped by 0.8% last month, reflecting a 4.1% decrease from the prior year. Shoe prices fell by 0.5% in February, with an annual increase of only 1.5%. For major home appliances, prices inched up 0.2% in February, translating to a mere 1.3% rise over the last year.
There are indeed signs suggesting tariff-related inflation. Prices for home furniture have surged. Just last year, they saw a sudden jump. Women’s clothing costs rose by 2.9%, although this was balanced by a 1.2% increase in men’s clothing. Jewelry and watch prices also saw significant increases. Nonetheless, in the broader context of consumer prices, these instances merely highlight exceptions rather than establish a trend.
The same pattern applies to the indirect pricing power theory. Overall, consumer durables actually experienced a 0.5% decline at the consumer level.
Producer prices show no signs of secondary inflation
The PPI backs up this narrative, and its implications are crucial. PPI is where indirect tariff influences come into play. The argument suggested that domestic manufacturers, cut off from foreign competition, would use their newfound pricing power to elevate their own product prices. Yet, this behavior is absent from the data. Final demand goods, excluding food and energy, incremented just 0.3% in February. The producer-level consumer durables were stagnant last month and only rose 3.3% over the year, trailing behind the broader final demand index, which grew 3.4%.
Finished consumer goods, again excluding food and energy, only increased by 0.3%. Personal consumer goods PPI, excluding those same categories, rose by just 0.5% in February, with an annual reading of merely 1.6%. This falls into disinflationary territory compared to last year’s figures.
Moreover, the trade service line indicates that the narrative of tariff inflation not only fizzles but reverses. Final demand trade services, which examine the profits that wholesalers and retailers make rather than the product prices themselves, saw a 0.4% rise in February and a 5.2% annual increase, significantly outpacing the overall final demand index of 3.4%. Growth was also noted in intermediate trade services across manufacturing and non-manufacturing sectors.
This is noteworthy. The last refuge in the tariff inflation conversation. Standard American consumers are, in effect, subscribing to a narrative suggesting foreign exporters hike dollar prices, importers either absorb or transfer those costs, and ultimately, consumers pay more. If consumers aren’t seeing increased prices and domestic profit margins are actually widening, then those expenses aren’t getting absorbed somewhere in the U.S. supply chain either. Rising margins at both wholesale and retail points showcase sellers with pricing power, rather than price shocks stemming from their actions.
However, that pricing power seemingly did not flow down to the consumer level. Had it done so, the consumer price data would have reflected it. The simplest explanation seems to be the burden of customs duty fell upstream, with foreign exporters adjusting their own pricing to maintain market presence, essentially absorbing the taxes themselves. This fits the government’s assertion and contradicts what critics of tariffs claimed could not happen on a large scale. The February PPI supports this perspective.
What triggered inflation in February? Factors linked to energy and food, such as weather disruptions — notably, a 48.9% increase in prices for fresh and dried vegetables at the producer level significantly affected final demand for food and services. Rental costs are still rising at 3.0% year over year, while medical services represented a 4.1% increase. These are ongoing structural pressures; they aren’t tied to trade policy.
Discussions about tariff inflation often lean toward being closer to the model than reality, built upon theoretical premises that critics presented as established facts. The February figures, the last data points before the policy’s repeal, are perhaps the most accurate indication we will have. The anticipated pass-through effects, both directly through imported consumer goods and indirectly through domestic pricing strategies, simply didn’t happen.
Somewhere along the journey from the economics office to the cash register, notable tariff inflation never materialized.
