Inflation Impact of Trump’s Tariffs

By Michael S. Derby

NEW YORK (Reuters) – A report by the Federal Reserve Bank of Boston, released on Thursday, indicated that the full suite of tariffs proposed by the Trump administration would have significantly increased inflation levels.

The planned 25% tariffs on Mexico and Canada, along with a 10% tariff on China, could have raised underlying price pressures by as much as 0.8 percentage points. This measurement is based on the Fed’s preferred gauge, the Personal Consumption Expenditures (PCE) price index.

Such an increase would have posed challenges for the Fed, particularly as inflation rates currently exceed the target of 2%. The PCE price index rose by 2.6% in December 2023 from the previous year, while core PCE, which excludes food and energy, increased by 2.8% over the same time frame.

The Fed has indicated that it expects inflation pressures to ease gradually, but there is uncertainty around the effects of tariffs on inflation data, as these would raise prices for consumers.

Boston Fed President Susan Collins mentioned in a television interview that “the kind of broad-based tariffs that were announced over the weekend, one would expect to have an impact on prices.” She further stated that these tariffs would lead to price increases in both final and intermediate goods.

Following a full percentage point rate cut last year, the Fed paused its easing strategy at the end of January. Officials seek clarity on the potential effects of Trump’s aggressive tariff policies on the economy.

Trump’s agenda has prominently featured high tariffs, which effectively act as import taxes paid by American consumers.

The Boston Fed’s paper analyzed the inflationary impact of tariffs on Canada, Mexico, and China that were set to come into effect. However, recent developments indicate that Canada and Mexico may avoid these tariffs, leaving future outcomes uncertain.

The paper also assumed that any tariff costs would be passed to consumers, although it noted that retaliatory actions, monetary policy changes, and exchange rate fluctuations could mitigate inflation impacts due to their dampening effect on economic growth.