Critics of U.S. President Donald Trump’s tariff scheme claim that it will be inflationary for American businesses and consumers, and one expert says that while there hasn’t yet been an inflation spike attributable to tariffs, there likely will be one at some point.
“Any time there is an economic shock, it takes a while for that shock to show up in consumer prices,” Leo Feler, chief economist at Chicago-based data and technology firm Numerator, told BNN Bloomberg in a Thursday interview.
“The surge of spending that we saw following the pandemic – in March 2021 you had consumers going out and spending a lot, releasing some of their pent-up saving – that actually led, 14 to 16 months later, to the peak of inflation. It took a while for that to work its way through the system.”
Feler said a similar delay is what should be expected when it comes to U.S. import tariffs, noting that increased costs for companies will eventually get passed on to their customers.
“We’ve seen in past tariff policies going back to 2017 that tariffs did get passed on to consumers – not 100 per cent of it, but the majority of tariffs got passed on to consumers, but it takes some time for that to happen,” he explained.
“Manufacturers have contracts with retailers; they can’t pass on higher prices immediately. Manufacturers also have contracts with their suppliers; their suppliers can’t pass on the higher cost of things like aluminum immediately.”
Feler said that because of these factors, the U.S. Federal Reserve is right to be wary of inflationary spikes down the line, despite the current U.S. inflation rate sitting just above the central bank’s two per cent target at 2.4 per cent, down from its peak of more than nine per cent in 2022.
“I do think that the Fed is right to be cautious of what will happen with future inflation. They did not get it 100 per cent correct coming out of the pandemic,” he argued.
“They thought inflation was going to be transitory – it turns out we’re almost back to two per cent, it’s just that the transitory period has taken much longer.”
In the late 1970s and late 1980s, Feler said, the U.S. experienced a “double spike of inflation,” which showed that after an initial inflationary shock, the second one becomes much harder to deal with.
“Consumers and businesses start setting expectations that inflation will be higher, and in order to get inflation back down, you have to try a lot harder – the economy actually has to weaken more than it would otherwise, and unemployment has to go up more than it would otherwise,” he said.
“The Fed is right to be cautious to make sure that right now, inflation does not see a secondary spike because consumers and businesses are already attuned to adjust their expectations if we start seeing inflation come up again given that we just came out of an inflationary experience.”
