Tariffs are “simply inflation,” says the economist: why is it?

There was a repeated message at Federal Reserve Chair Jerome Powell’s press conference on Wednesday: tariffs will raise consumer prices.

The US Central Bank has raised its 2025 inflation forecast, as many economists have done, due to the expected impact of the trade war launched by the Trump administration.

“The majority of that comes from tariffs,” Powell said of the rising Fed’s estimate of inflation.

“I think once tariff inflation arrives, further progress may be delayed,” Powell said.

His statement comes at a time when inflation has gradually declined during the pandemic era, but has yet to be completely tamed by the Fed’s target of 2% annual inflation.

“Even though Donald Trump might tell people, tariffs are simply inflationary,” said Bradley Sanders, North American economist in capital economics.

Customs duties are taxes on imports. US-based importers (for example, clothing retailers and supermarkets) pay taxes so that goods can settle customs and enter the country.

According to economists, tariffs raise consumer prices in several ways.

For one, tariffs add costs to U.S. businesses, which could potentially charge higher prices in stores rather than hit profits. Sanders said.

Tariffs are protectionist economic policies. In other words, they are trying to protect US companies from international competition by making foreign products more expensive.

Instead of paying a higher price to foreign counterparts, consumers can switch to US products. However, that logic may not pan out. The US alternatives likely were more expensive than foreign products, Sanders said – otherwise, why would consumers not buy the good produced in the US?

Therefore, he said that tariffs can pay consumers more for either of the products they choose to buy.

For example, tariffs in Canada, China and Mexico cost around $1,200 a year for a typical US household, according to a February analysis by economists at the Peterson Institute for International Economics. (This analysis modeled the direct costs of 25% tariffs in Canada and Mexico, and the 10% extra fee in China.)

The president’s economic agenda, including tariffs, will create new jobs, White House spokesman Kush Desai said in response to a request for comment from CNBC on the impact of tariff inflation.

Trump has imposed many tariffs since taking office in January.

The Trump administration has collected imports from China and many products from Canada and Mexico. The three largest US trading partners plan to place a 25% tariff on steel and aluminum, and to impose mutual tariffs on all US trading partners in April. The White House also shows that copper and timber duties are approaching.

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President Trump imposed tariffs on imports of about $380 billion in 2018 and 2019 during his first term, according to the Tax Foundation. The Biden administration kept most of them intact.

This time, tariffs are much broader. They now have an impact of more than $1 trillion, the Tax Foundation said. If some products in Canada and Mexico expire in early April, the total will increase to $1.4 trillion.

It was primarily a “US-China” trade war during Trump’s first term, Sanders said. “Now, he said it was “all trade wars in the United States.”

According to economists, there is also an indirect consumer impact from tariffs.

At that point, many US companies are manufacturing their products using products that are eligible for fees.

For example, automakers, construction companies, farm equipment manufacturers, and many other companies use steel as their production input.

According to estimates from consulting firm Anderson Economic Group, tariffs can increase the car price to $4,000 depending on a variety of factors, including vehicle type.

According to the National Association of Home Builders, builders estimate that recent tariffs will add $9,200 to the typical home costs.

Economic studies suggest that tariffs could create jobs in certain protected US industries, but ultimately cost US employment on net profits after taking into account retaliation and increased production costs for other industries.

“Trying to protect certain industries can actually make other industries more vulnerable,” said Lydia Cox, an assistant professor of economics at the University of Wisconsin Madison University, in a recent webinar.

Trump said the administration’s tariff policies could cause short-term “pain” for Americans.

Economists emphasize that there is ample uncertainty and that inflation ups may be temporary rather than consistently increasing prices over the long term.

Treasury Secretary Scott Bescent hinted at the findings in a recent CNBC interview.

“Taxes are a one-off price adjustment,” Bessent said. He also said the Trump administration has “lol-relief” about the decline in oil and mortgage fees.

The Federal Reserve raised its 2025 inflation forecast to 0.3 percentage points in a summary of its economic forecast issued Wednesday from its 2.5% estimate in December. (This forecast is for the “core” personal consumption expenditure price index. PCE is the Fed’s preferred inflation gauge, with core prices stripping away the volatile food and energy categories.)

Similarly, Goldman Sachs Research is hoping Core PCE will “re-accelerate” to 3% in 2025, up about half the points from previous forecasts.

“It’s really hard to know how this works,” said Powell.