Weekly Updates
Weekly Updates
- Could tariffs reignite inflation, just when economists are celebrating its containment? A tariff is a specialized sales tax, paid primarily by consumers. Like any other sales tax, a tariff creates a one-off rise in the price level, not the continuous increase that creates an inflation problem. But there are three other ways tariffs make inflation worse.
- Tariffs make profit-led inflation easier. Consumers may feel a 10% tariff justifies a 10% price rise. But tariffs are charged on the import price, not the consumer price—and import prices are often less than half the consumer price. Passing on a 10% tariff should result in consumer prices rising less than 5%. If they rise by more, it is because someone is increasing profits under the cover of a good story.
- Price increases from tariffs might lead to higher wage demands from workers. This is more likely if the tariffs are broad based. Those higher wage demands increase costs, including in non-traded sectors of the economy, pushing up the price of a wider range of goods and services.
- Tariffs can also reduce competition, even after they have been reversed. Companies may be unwilling to invest in distributing their product in a country that operates, or has operated, a prejudicial sales tax against them.
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