Tariffs Haven’t Yet Triggered Inflation, and Economists Are at Odds as to What’s Next

Is April’s tame inflation the calm before the storm? Depends on who you ask.

Chinese-made cars for export at a port in Shanghai, China, on April 17, 2025. (AFP) / China OUT)

Many economists have forecast that President Donald Trump’s imposition of tariffs would, by driving up the cost of imports, revive inflation. The most recent data, however, indicate that the rate of price increases has remained subdued thus far.

Some analysts see the rate of inflation reported in April, which was the lowest since February 2021, as the calm before the storm, arguing that it will take time for supply-chain disruptions to work their way through inventories and be felt by consumers in the form of shortages and price hikes. But others predict that the impact of Trump’s tariffs on inflation will be limited or will be offset by other factors. 

Analyzing the tariffs announced as of April 2, Yale University’s Budget Lab calculated that the tariffs would increase consumer prices across America by about 2.3 percent, equal to a loss of purchasing power of $3,800 per household.

The current state of the supply chains is similar to the early days of the COVID-19 pandemic, Willy Shih, a professor at Harvard Business School, said at a roundtable on tariffs last month. In March 2020, as the pandemic took hold, there were 41 “blank sailings,” a trade term referring to the cancellation of a scheduled shipping voyage, Shih said; this April, there had already been 80 blank sailings.

“That means the [current] drop-off in trade is even more severe than the pandemic,” Shih stated. “One very important parallel to what happened with COVID is we saw this delayed response where the consumers didn’t really feel the impact of some of the things that were happening in the trade lanes, and the cut off of imports, until a little bit longer, just because of the time it takes to flow through the supply chain.”

Since April, however, Trump has entered into trade negotiations with several countries, including a deal with China on May 12 to temporarily reduce tariffs. In addition, some economists argue that even if some tariffs remain in place, other factors could mitigate or overwhelm their impact on inflation. 

A Cooling Economy and Tight Money Supply

“The economy has been gradually cooling, affecting both the labor market and inflation rates,” Stephen Kates, financial analyst at Bankrate, told The Epoch Times. “Wage growth is slowing, while grocery and gasoline prices are declining, and the rise in shelter costs has moderated.” 

However, Kates predicts higher prices are coming soon, with surveys from the Federal Reserve banks of Dallas and Philadelphia indicating that companies plan to start hiking prices for consumers by May or June.

“I anticipate inflation will peak between 3 percent and 4 percent over the next year, which, although better than the peak in 2022, remains a challenge for inflation-weary consumers,” Kates said.

But consumers are now less tolerant of price increases than they were three years ago, he added, which will put pressure on companies to absorb at least some of the additional costs from tariffs.

On May 17, Trump pressured Walmart, America’s largest retailer, not to raise prices.

“Between Walmart and China they should, as is said, ‘EAT THE TARIFFS,’ and not charge valued customers ANYTHING,” Trump wrote on Truth Social, “I’ll be watching, and so will your customers!!!”

This was in response to Walmart’s announcement that it would raise prices on tariffed goods starting in late May. 

In contrast to those who predict rising inflation from tariffs, economists from the monetarist school argue that inflation is a function of the money supply, which is currently restrictive and will drive inflation down.

“All the talk about tariffs and inflation is misguided,” Steve Hanke, professor of applied economics at Johns Hopkins University, told The Epoch Times. “The new tariffs will change relative prices, but inflation is always and everywhere a monetary phenomenon,” he said, quoting a 1963 comment by economist Milton Friedman.

Historically, high inflation (i.e., typically above 4 percent per year) has been preceded by significant increases in the money supply in countries around the world, Hanke said. 

“In the case of the United States, the money supply has flatlined since the summer of 2022, and is growing at a subpar rate relative to the Fed’s 2 percent inflation target,” he said, predicting that with the currently “anemic” growth in America’s money supply, “inflation will hit the Fed’s 2 percent target in 2025, or might even fall below.” 

A ‘Relatively Closed Economy’

The impact of tariffs is also a function of how reliant America is on imports, which may be significantly less than many people might expect. A May 19 report by Bart Hobijn and Fernanda Nechio, analysts at the Federal Reserve Bank of San Francisco, calculated that imports amounted to only about 14 percent of U.S. GDP in 2024. 

Despite how often shoppers see product labels that say “made in China” or “made in Mexico,” the United States “remains a relatively closed economy,” the report states. “In fact, the vast majority of goods and services sold in the United States are produced domestically,” it says.

One reason for this is that even for products labeled as foreign-made, the price to consumers also includes the value added within the United States, such as domestic transportation, wholesale and retail costs, and associated markups. Even in the case of clothing, with large components of foreign value added, the majority of the retail price—70 percent, on average—is due to domestic sources. 

For consumer products, the report states, about 9 percent of the retail price is due to import content; for products bought by businesses, the import content is significantly higher—about 38 percent. Consequently, the impact of an across-the-board 25 percent tariff on all imports would be much larger on investment goods, or about a 9.5 percent price increase, than on consumption goods, about 2.2 percent.  

Meanwhile, awaiting clarity on where inflation is headed, the Fed has taken a wait-and-see approach to adjusting interest rates. 

Inflation Expectations ‘Largely Stable’

While speaking at a conference of Federal Reserve directors in New York on May 14, Fed Vice Chair Philip Jefferson described the uncertainty the central bank is wrestling with when deciding on whether to raise or lower interest rates. Inflation in services had stalled and even come down in housing-related services, indicating the potential for disinflation, he said, but inflation for goods, excluding food and energy, has increased slightly so far this year. 

“Whether tariffs create persistent upward pressure on inflation will depend on how trade policy is implemented, the pass-through to consumer prices, the reaction of supply chains, and the performance of the economy,” Jefferson stated. “Short-term inflation expectations have increased in both survey- and market-based measures, but I think it is notable that most measures of longer-run inflation expectations have been largely stable.”

While much focus has been on Trump’s trade policies, Jefferson said, the Fed is also looking at the impact on the economy from other factors, including immigration policy, deregulation, and the budget process.  

Reviewing April’s inflation numbers, he highlighted that the Personal Consumption Expenditures (PCE) inflation was down from its peak above 7 percent in mid-2022. Core PCE inflation in April, which excludes volatile consumer energy and food prices, was at 2.6 percent, up slightly from March’s annualized rate of 2.3 percent but down from April 2024, he said.

“The Federal Reserve plans to maintain the federal funds rate in the range of 4.25–4.50 percent for the next few months, with the first rate cut currently expected in September,” Kates said.

If Trump can successfully negotiate lower tariff barriers and Congress can cut spending and reduce deficits in the current budget, this will go a long way toward bringing inflation down below the Fed’s 2 percent target, he said.

According to Hanke, however, in order to keep inflation under control, “Trump and the GOP should insist, as President Reagan did, that Congress and the Fed embrace ‘stable money.’ The only way to do that is to embrace the Quantity Theory of Money,” which states that the general price level in an economy is directly proportional to the amount of money in circulation.