Weekly Updates
Weekly Updates
- Voters’ perceptions of inflation were important in the recent US elections. The economy was the top concern for Republican voters, and three quarters of US voters felt inflation created hardship for them this year. That negative perception outweighed the benign reality.
- US President-elect Trump has talked repeatedly about raising tariffs. These taxes will be paid by US buyers of imported goods, and as these are passed down the supply chain, they will raise domestic US inflation. Despite the political power of inflation, there are two reasons such an increase in US prices may not prevent tariffs.
- Tariffs are applied at the point of import. All subsequent costs (retail, wholesale, transport, etc.) are not subject to the tariff. Thus, a 20% tariff on a finished consumer good should raise its price around 8% in the store. Tariffs are less visible to consumers, and some impact may be absorbed by squeezing profits along supply chains.
- Tariffs generally apply to lower-frequency purchases like consumer durable goods. Consumers are less aware of the price of these goods; inflation perceptions are formed by hyper-awareness of the price of frequent purchases like food and fuel (less likely to be imported). Tariffs may end up raising inflation with less impact on the politically important perception of inflation.
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