As President Donald Trump announced several waves of tariffs that ultimately extended to more than $250 billion of imports, Federal Reserve economists and policy makers alike warned that they posed a risk to growth.
Now that the first signs of the spat are feeding into hard data, it’s becoming clear that the tiff is also helping the Federal Reserve to achieve one of its dual mandate goals.
America’s central bank is tasked with maintaining full sustainable employment and inflation that’s stable at a low level, which it has defined as 2 percent. In 2018, the Federal Reserve nearly hit its target on a sustained basis for the first time since it formally adopted it in 2012—and economists at Goldman Sachs Group Inc., UBS Securities LLC, and the New York Fed itself find that the trade spat has been a significant factor driving prices higher.
Goldman Sachs analysts wrote in a Jan. 21 note that tariffs have bolstered prices more than they’d initially suspected. Domestic producers opportunistically increased the prices they charged in response to higher trade restrictions—in effect, they used the policy as cover to eke out some pricing power, they find. They also analyze nine consumer price categories directly impacted by tariffs, and find “sharp divergence relative to the other core goods categories.”
Goldman’s crew thinks the levies are currently pushing up core inflation by around 0.15 percentage points, plus “perhaps another few basis points in the pipeline from spillover effects.”
The New York Fed offers an even more aggressive estimate. Their analysis, which looks at industry-level Producer Price Index increases, finds a significant and quick reaction to tariffs that—if extended to consumer prices—could have pushed 2018 inflation higher by about a third of a percent.
Over at UBS—where the team includes Alan Detmeister, former head of the Fed Board’s price and wage division—economists expect tariffs to boost prices by 0.1 percentage points this year, assuming the hit to the most recent tranche of Chinese imports remains at 10 percent instead of rising to 25 percent in March. Interestingly, that’s just slightly less than the effect of the current tight labor market. The researchers have low unemployment lifting prices higher by 0.15 percentage points.
The concerning news inherent in this finding? Tariff-spurred inflation isn’t the sort of demand-based price gain that the Fed is really aiming for. If the trade tiff is resolved, the central bank could find itself missing its goal by even more.
