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What Will Trump’s Latest Tariffs Mean for Inflation? Not Too Much, Economists Say

The Trump administration’s latest tariff increases on Chinese imports will likely deliver a modest and temporary boost to U.S. inflation, in part reflecting the relatively small portion of American spending that goes to goods rather than services.

President Trump’s decision last week to raise tariffs on roughly $200 billion of goods, to 25% from 10%, represents the single biggest escalation of his yearlong confrontation with China. The new duties could amount to as much as $30 billion of annual revenues for the government — and additional costs for U.S. consumers. Mr. Trump’s threat to impose 25% duties on an additional $300 billion of imports from China, if carried out, would have a larger impact at up to $75 billion a year in revenue to the U.S. government.

Though recent studies have shown U.S. consumers have borne the brunt of such costs in the past, economists point out that they amount to a drop in the bucket of the U.S.’s $21 trillion economy. Since 1970, American households have spent more on services — such as housing, health care and education — than goods, many of which have become cheaper over the decades thanks to trade and technological innovation.

“I think the overall impact on inflation will probably still remain relatively subdued,” says Sonia Meskin, a U.S. economist at Standard Chartered, of the new and threatened tariffs.

Economists have to squint to see any effect from last year’s tariff increases on broad inflation data. Price pressures have softened in recent months, with the Fed’s preferred gauge, the personal-consumption expenditures price index, up just 1.5% in March from a year earlier, well below its 2% target.

Estimates for the potential effect of the coming tariff increases vary widely. Ms. Meskin thinks they are unlikely to push annual inflation up by more than 0.05 percentage point. Goldman Sachs, meanwhile, estimates that the threatened tariffs could add as much as 0.5 percentage point to the so-called “core” personal-consumption expenditures price index, which excludes volatile food and energy items.

Economists say conflicting forces make the likely impact hard to pin down.

On the one hand, higher tariffs can produce indirect “spillover” effects that lead to price hikes for a wider range of products than those specifically targeted. For instance, a paper released last month showed that prices for dryers rose sharply last year after Mr. Trump placed tariffs on imported washing machines in January 2018. Goldman Sachs, meanwhile, found that the tariffs targeting Chinese goods appeared to allow makers of the same goods in other countries to “opportunistically” raise prices in response to lessened competition.

On the other hand, a strengthening U.S. dollar may help Chinese producers absorb some of the tariffs’ costs. The yuan has depreciated 7.3% over the past year as China’s economic prospects soured in the face of U.S. tariffs, with nearly a third of the losses coming since Mr. Trump began his latest round of threats on May 5.

Companies can also decide to settle for narrower margins rather than risk losing market share.

Kitchenware manufacturer Lifetime Brands Inc., for instance, saw its first-quarter profit margins narrow in part because of the tariffs implemented last year. Chief Executive Robert Bruce Kay said the size of Mr. Trump’s coming tariffs could make that difficult.

“When you have a 25% tariff, you can’t mitigate that completely, you need to pass on price increases,” Mr. Kay said in a conference call with investors last week. “So there is no doubt in terms of the marketplace that at 25%, the customer will absorb it. It will get pushed through, the retailers will just push it through.”

Many U.S. companies have also begun shifting their supply chains away from China, where rising wage costs were complicating exporters’ plans even before Mr. Trump launched his trade confrontation.

“We as well as others have gone to alternative sources that still have high quality, still have low cost and are not subject to the tariffs,” said Barry Pennypacker, chief executive of crane manufacturer The Manitowoc Co., in a conference call last week. “We have been moving production around the world.”

Regardless of the tariffs’ impact on inflation, economists say, the Federal Reserve is unlikely to raise interest rates in response. Central bankers have been more preoccupied this year with inflation being too low rather than too high, and Fed Chairman Jerome Powell has indicated a willingness to look past price increases that are likely to be one-off. Economists say higher tariffs should feed into annual inflation numbers for a year, but after that there should either be no new impact or downward price pressures if the tariffs are eventually reduced.

“I think the Fed will judge it to be a temporary adjustment higher in inflation and be much more concerned about what it means for growth and for business and consumer spending,” said Michelle Meyer, a U.S. economist at Bank of America Merrill Lynch.
Source: Dow Jones

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