Tariffs and the Persistence of Inflation

On July 31, the Trump administration finalized the tariff rates for over 100 countries. Although the scale of the inflationary impact is still unclear, policymakers need to equally weigh the "persistency" effect of the tariff policy on inflation. Core consumer price inflation averaged 3.5% in 2023 and 2024, and Trump's tariff policy could maintain core inflation above 3% until 2026 or even longer.

There are two reasons for the delay in the reported inflation resulting from Trump's tariff policy. Firstly, even though the reciprocal tariffs were announced on April 2, Trump postponed their implementation on April 9 due to the turmoil in the financial markets caused by the magnitude of the proposed tariffs.

Second, it can take weeks or even months for tariffs to raise the "cost of goods" for many companies. This delay is due to the substantial inventory of goods that needs to be sold before the higher-priced imports affect the companies' "cost of goods." At the beginning of 2025, U.S. inventories amounted to $2.3 trillion, while imports of goods in Q2 were $750 billion, indicating a still considerable stock of items priced below those impacted by tariffs.

Nonetheless, the expense of new products and materials is expected to rise considerably soon. In July, producer prices for final demand goods (excluding food and energy) rose by 0.4%, processed goods at the intermediate level by 0.5%, and unprocessed goods by 2%. It's crucial to understand that producer prices don't directly include tariffs, but tariffs can indirectly raise the costs of production materials or lead companies to elevate domestic prices along with the tariff-influenced prices of imported goods.

Core consumer price inflation is exceeding 3% for 2025, and with each passing day, the likelihood grows that Trump's tariff policy will continue, keeping core inflation at 3% or higher for the foreseeable future, aligning with people's inflation expectations.