Tariffs: Inflationary, or Not Inflationary?

 

Economics Without The B.S.**: 

[**  Double entendre intended.]

Several Federal Reserve officials, including Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller, both appointed by President Trump, have suggested that the inflationary effects of tariffs are likely to be a one-time price level shift rather than a persistent inflation problem.

I disagree with that. A one-time hit on prices is like the sales tax you pay when you go shopping. The tariff is like a value-added tax; it is imposed on our importers at the time it hits our shores, and then it is passed along the supply chain.

The difference between the two is the sales tax comes at the end of the transaction stream; whereas the tariffs come at an intermediary point in the transaction stream, where the system is more dynamic as these transactions become more repetitive. Because it is at the intermediary level you have many different activities involved -- shipping, transportation, warehousing, and even service activities like firms who finance transactions and payrolls with accounts receivables -- with each one taking their cut, passing it along or absorbing the cost. So as these tariffs continue to get imposed over and over again as shipments are repeated, you are never sure how the different intermediaries are going to react to the extra charge each time and how that either gets absorbed into their operational costs or gets passed along as a cost to the next party.

The chart shows that prices at the wholesale level are more volatile than at the consumer/retail level. In other words, the prices in the supply chain at the intermediary level do not always result in getting passed to consumers -- sometimes they do, sometimes they don't.