Trumponomics: Expect higher inflation—with or without tariffs
Feb 5, 2025
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Michael Weber, a Chicago Booth researcher focusing on consumer behavior and tariffs, discusses the intriguing impacts of Trumponomics. He reveals how consumer expectations of rising prices are reshaping shopping habits and driving inflation. The conversation touches on the parallels between tariffs and sales taxes, leading to misconceptions that prompt stockpiling. Weber also highlights the tension between the Trump administration and the Federal Reserve, as they navigate the delicate balance between domestic job growth and inflation control.
Consumer behavior is shifting as many Americans stockpile goods in anticipation of future tariff-induced price hikes, contributing to inflation.
The anticipated rise in tariffs is likely to create tensions between the Trump administration and the Federal Reserve regarding inflation management.
Deep dives
Consumer Response to Tariff Expectations
Consumers are bracing for significant increases in tariffs, particularly on imports from China, with expectations averaging around 35%. This behavior has led to a noticeable shift in shopping patterns, as consumers are stockpiling goods in anticipation of higher prices. The survey findings indicate that many Americans seem to believe the tariffs will have dire financial consequences, prompting them to take proactive measures to mitigate potential price hikes. Consequently, inflationary pressures are expected to rise, which could create conflicts for the Trump administration with the Federal Reserve.
Understanding Tariffs as Sales Tax
Tariffs are effectively being viewed by consumers as a form of sales tax, which they understand will be passed on through higher prices for both imported and domestically produced goods. Many survey participants anticipate that they will shoulder a significant portion of the increased costs, with roughly half of the burden expected to land on consumers. This understanding contradicts the narrative suggesting that foreign producers would bear most of the costs, reflecting a deeper awareness among voters regarding the implications of tariff policies. Thus, even if domestic production increases, the corresponding rise in prices is likely to negatively impact consumers.
Potential Economic Implications of Tariff Policies
The anticipated increase in tariffs is expected to exacerbate inflationary pressures, influencing both consumer behavior and business decisions across the economy. Firms are preemptively raising prices in response to expected increases in input costs, further contributing to inflation, regardless of whether the tariffs are eventually implemented. Heightened pressure on the Federal Reserve to manage interest rates may ensue, as conflicting interests emerge between administration policies and monetary policy aimed at controlling inflation. This complex interaction raises concerns over the economic landscape, indicating that inflation may persist regardless of the tariff outcomes.
In the launch episode of a new series about Trumponomics, we address tariffs — the most beautiful word in the dictionary, according to Donald Trump. The US President ran promising to increase duties on all imports. In office he has ordered, and then paused, tariffs on Mexico and Canada, and started a tit-for-tat tariff feud with China. How is all this affecting the US economy? Chicago Booth’s Michael Weber has conducted research that documents how consumers have for months been shopping in anticipation of tariffs being put in place. That looks set to raise inflation, and set the Trump administration on a collision course with the Federal Reserve.
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