How inflationary are tariffs, really?

Robert Armstrong (0:00)

Special note to listeners, we're very keen to hear your questions and answer them on the air. If you have burning questions about markets, finance or the economy, send them to robert.armstrongatft.com.

Chris Giles (0:22)

Pushkin.

Josh Oliver (0:26)

Donald Trump has just announced day one tariffs on China and also on Mexico and Canada, which restarts a favorite genre of economic reporting, very complicated stories about North American trade. So today on the show, the question everyone's asking, are tariffs really inflationary? This is Unhedged, the Finance and Markets podcast from the Financial Times and Pushkin. I'm Josh Oliver, the FT's real estate correspondent, filling in for Katie Martin, filling in for Rob Armstrong, and truly scraping the bottom of the substitute host barrel. Luckily, our guest is from the very top of the guest barrel. We have Chris Giles, the FT's economics commentator and author of our excellent Central Bank's newsletter. So Chris, let me start with this. Why is it that people think tariffs will be inflationary?

Chris Giles (1:10)

Well, ultimately, tariffs are a tax on imports, and it's a tax on price of imports. If it gets pushed through to consumer prices, that raises the price level, and that might be seen as a price level increase that would certainly raise inflation in the short term, and then if it fed through to wages and prices, it could be inflationary. So that's why people think they're inflationary. The question is, how inflationary? I think that's the real question we're trying to get to the bottom of today.

Josh Oliver (1:39)

Is it sort of just a technical thing, where if the tariff means that such and such costs x amount more, then that shows up in the inflation survey, and then that gets reported as more inflation? Or is it more fundamental than that, if you have tariffs around an economy, that it drives up inflation in other ways?

Chris Giles (1:55)

Well, I think if we want to talk about it being genuinely inflationary, then it should be driving up inflation on an ongoing process, not just an increase in the price level of a particular tariff item or good that has a particular tariff applied to it, because that's really a price level shift. But people conflate the two all the time.

Josh Oliver (2:18)

We're not going to do that, are we?

Chris Giles (2:19)

We're not going to do that.

Josh Oliver (2:20)

We'll never do that.

Chris Giles (2:21)

We're going to talk about this really carefully and try and get to the bottom of whether these things really are inflationary. And I'll try and tell you when I think it's a price level shift and when I think it might have a inflationary impact.

Josh Oliver (2:32)

Does the impact depend on what type of economy we're talking about? I mean, you wrote a great piece on this in the FT where you pointed out that the US is a remarkably closed economy. But can you explain what that means and why it matters to the impact of tariffs?

Chris Giles (2:45)

It certainly matters. So open economies do a lot of trading when it comes to tariffs. We're talking about trading in goods because tariffs are not applied to services. So they do a lot of trading in, open economies do a lot of trading in goods. So goods, imports and exports are a big share of the economy. Germany, for example, if you add up all the goods, imports and all the goods, exports, it comes to about 70% of the German economy. Clearly, when you get to bigger economies, more of the stuff happens within the borders. So if you look at the EU, it's about 30% is external trade. China, 33%, US, 19%.

So the US is a very closed economy. Much, much of the activity is all happening within the US, rather than externally US trading with other countries. And that means that immediately, it means the effect of tariffs. We shouldn't exaggerate them, because most of what goes on in the US happens within the US, not crossing borders.

Josh Oliver (3:49)

Chris, what does all this have to do with washing machines?

Chris Giles (3:52)

Well, washing machines were a bit of a cause celebre in the last Trump administration. It was the first thing he put tariffs on very publicly in 2018, and then everyone wanted to look at the price of washing machines. And the obvious thing to do was to look at the price of washing machines in the US, compared with the price of other appliances.

Josh Oliver (4:14)

Because it was washing machines specifically, not dishwashers and fridges and other bits.

Chris Giles (4:18)