It is the question that seems everyone in the news and financial media is consumed with: will tariffs cause inflation to return, or worse yet will it cause an economic recession? Below I will show you some of my research from the first Trump administration, what I believe are causes of inflation, and what may or may not happen.
Let us begin with what seems like a political answer to the above question: Yes, inflation could spike due to tariffs, or it may not move prices to any great degree. Here is what my research tells me:
- Inflation during the first Trump Administration averaged 1.93% annually, hardly high inflation at all.
- This was despite several tariffs being instituted, from 30% on Solar Panels, 50% on washing machines, 25% on Steel, and a host of other tariffs directed towards China.
- Several things happened as a result; countries negotiated lower or no tariffs by changing their tariffs on imported American products and companies found ways to bypass the tariffs and absorbed some of the costs. Ultimately, the duration of the tariffs and any change in American exports will determine their potential economic impact.
One of the causes of inflation is normally too much money chasing too few goods. During the Covid pandemic, a significant amount of money was injected into our economic system to keep the economy afloat. When President Biden was elected, he did what many Presidents do, pass legislation that he campaigned on, which injected another $4 trillion dollars into our economy. In the end, the economy was over-stimulated, too much cash was introduced into our financial system, and prices rose as a result.
In summary, there are several things we can pay attention to going forward. Consumer spending, corporate investment, additional tax cuts and tariffs are a few different areas of the economy that can provide some indication. Inflation does not happen at the drop of a hat; it takes a while to ramp up and takes some time to drop.
As always, remember this is my opinion based on my 40 plus years of observation of the economy and financial markets. Please feel free to send me Your2Cents, I am always glad to read and will try to respond to them all. Until then, look for more questions and answers as we move forward.
Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results.