Could Tariffs Eclipse CPI?

An Article by Peter Tchir via Academy Securities

Despite high headlines on Producer Price Index (PPI), markets seemed largely unaffected, and for a number of valid reasons. Now, however, the focus shifts to the Consumer Price Index (CPI), with the "whisper number" expected to be lower than anticipated. But what's really grabbing my attention are the tariffs. My memory of tariffs is that the initial round imposed by President Trump in 2018 was met with widespread disapproval from economists. To verify my recollection, I decided to consult with ChatGPT.

ChatGPT's Recollection of the 2018 Tariffs

ChatGPT confirmed that the media's response to President Trump's 2018 tariffs was indeed largely negative, with economists, business groups, and various sectors affected by the tariffs voicing their criticism.

Economists' Perspective

The majority of economists believed that the tariffs would be harmful to the U.S. economy. In a survey conducted by Reuters in March 2018, almost 80% of economists stated that the steel and aluminum tariffs would be detrimental, with none predicting economic benefits. Many economists and organizations, including over 1,000 who wrote a warning letter, compared the tariffs to historical policy mistakes like the Smoot-Hawley Tariff Act, which contributed to the Great Depression.

Economic Impact

Analyses suggested that the tariffs led to increased costs for U.S. consumers and businesses. A study found that by December 2018, the tariffs had reduced U.S. real income by $1.4 billion per month and increased consumer costs by $3.2 billion per month. The prices of intermediate goods rose by 10% to 30%, and the tariffs were equated to a significant tax increase, potentially offsetting the benefits of Trump's 2017 tax cuts.

Business and Industry Reaction

The Council on Foreign Relations highlighted the chaos and negative market reactions following the announcement of the tariffs. The Dow Jones Industrial Average fell significantly after the tariffs were announced, reflecting concerns about their impact on the global trading system and U.S. economic stability.

Agriculture Sector

U.S. farmers were particularly critical of the tariffs due to the retaliatory measures from other countries, which significantly hurt their exports. The Trump administration attempted to mitigate this by announcing $12 billion in emergency relief for farmers, but this was met with mixed reactions. Many farmers and legislators criticized the relief as insufficient and labeled it as temporary "welfare" rather than a solution to the underlying trade issues.

Current Tariff Situation

It's interesting to note that not only were the original tariffs kept in place long after the election (and are still in place), but we’ve now added to them. While I agree that many of these are useful and necessary, I do think that in some cases like solar panels, we’ve been our own worst enemy. I am not sure how the tariffs won’t add to inflation and create some possible supply issues. I am also unsure how easy it will be for China to circumvent these by utilizing facilities in countries like Mexico. If they can, and are more incentivized than they already have been, it will continue to slow on-shoring and near-shoring efforts (and make them more expensive to execute). I am not sure that China will come back with a “measured” response? I think the risk of renewed serious inflation has been put back on the table. It isn’t going to impact CPI tomorrow, but in 3 months? 6 months? I see the longer-term benefits of creating an economy that is more secure (and am fully on board with that), but that doesn’t mean we haven’t created new and additional inflation risks. Do I become bearish on yields today, or wait until after what seems to be a widely expected post CPI rally?

What's your take?

This article has presented a lot of information and perspectives on tariffs and their potential impact on inflation and the economy. It's clear that these are complex issues with far-reaching implications. What do you think about the points raised in this article? Do you agree or disagree with the presented views? Please share your thoughts and this article with your friends. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.