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Your guide to what Trump’s second term means for Washington, business and the world
The world’s trade and macro wonks have a new and exciting drama to watch. When will the Trump tariffs hit American consumers with higher prices? Will tariff inflation be like the poet Richard Armour’s description of shaking a ketchup bottle, “None will come, and then a lot’ll”? Or will it be Samuel Beckett’s Godot, always expected but never arriving? Will the Supreme Court, like a disinflationary vigilante posse, head off price rises at the pass by gunning down the tariffs as unconstitutional?
Economics aside, tariff inflation may not be Trump’s biggest political worry. Currently the most salient price rises are in a domestically produced service, electric power. Trump may be less responsible for inflation in services than in imported goods, but as Joe Biden could tell you about the price of eggs, being provably at fault isn’t always necessary to incur political damage.
So far, according to analysis by the economists Alberto Cavallo, Paola Llamas and Franco Vázquez based on a tariff tracker of prices, the tariffs haven’t had much inflationary impact. Compared with a year ago, consumer prices of imported goods are only a fraction higher than those produced domestically, much lower than the rise in tariff revenue. Since exporters’ prices haven’t fallen much, US companies in the domestic supply chain are evidently absorbing most of the tariff hit.
Obviously a sustained squeeze on profits will inflict damage, as businesses shrink or close. But politically that will be less salient to voters than inflation restricting American children, as Trump himself bizarrely predicted, to a meagre two dolls each.
The prospects for pass-through remain uncertain. Most of the Trump so-called “reciprocal” tariffs were threatened earlier in the year but not imposed until August. Retailers may be waiting to see whether the tariffs survive legal challenge before raising prices.
It’s not even a given that consumers will ever bear most of the cost. Estimates suggest the burden of Trump’s first-term duties was shared to various degrees between households and companies through higher consumer prices and squeezed margins respectively.
On that occasion Trump wrongly predicted that foreign companies would take the hit by reducing prices. However, the academics Mary Amiti, Stephen Redding and David Weinstein said in a study that such an outcome was surprising. In the past foreign companies, presumably to preserve market share in the US, have responded to exchange rate shocks by cutting export prices somewhat, muting the pass-through into US domestic prices.
Much of the action, however, may be in services, which are generally given far less attention than warranted by their economic heft. Durable goods are less than 11 per cent of the weights used to construct the personal consumption expenditure index, whereas services — even excluding housing — are around 50 per cent. Healthcare alone is 17 per cent.
This year so far the rise in goods price inflation has been offset by a fall in services. That, however, masks at least one high-profile price increase, that of electricity. Power tariffs for households are 7 per cent higher than this time last year. The causes are complex; one is the expansion in demand from data centres related to the artificial intelligence boom. But another is a supply-side shock: the withdrawal of green subsidies granted under Joe Biden’s Inflation Reduction Act. Trump recently tried to cancel a windpower project in New England that was already 80 per cent complete, apparently from simple spite.
Sharper Democrats have seized on this as an attack line, which certainly beats desperately hoping egg prices shoot up again. Rahm Emanuel, formerly Barack Obama’s chief of staff, argued last week that the Democrats should hammer Trump over power prices with a “ratepayer-first” strategy, supporting renewable generation as an economic good in itself rather than just to combat climate change.
The Democrats have already started to criticise Trump on healthcare. Health insurance prices are likely to rise sharply, partly because Trump is reducing eligibility under the Affordable Care Act.
There are other services vulnerable to inflation that might be pinned to the president. Home insurance costs have risen sharply and sometimes cover has been withdrawn altogether in states like Florida and California prone to hurricanes and wildfires. Insurance is regulated at state rather than federal level, but the public may at some point accept that a big problem is the climate change Trump says doesn’t exist.
Another is the cost of higher education, where Trump is abolishing a Biden programme to make it easier for graduates to manage student debt. A further one is housing: the causes of America’s problem with affordable shelter are many, but as well as the rising cost of imported building materials they include Trump’s vile campaign of throwing immigrants, including construction workers, out of the country.
Now, Trump is adept at blaming anyone but himself for economic problems. To him, home insurance prices are the fault of woke environmentalists failing to rake forests clear; healthcare reflects price-gouging pharmaceutical companies; power prices are pushed up by renewable energy displacing good old American fossil fuels.
But it’s anyone’s guess whether those excuses get traction. It would be some kind of strange justice if price rises in the goods sector that Trump is so fixated on hurt him less than the services he seems to care much less about. It could, of course, be both.
