Even a Brief Inflation Resurgence Would Hit Americans Hard

Ever since President Trump made his sweeping tariff announcement last month, economists have widely agreed that the tariffs will likely lead to higher prices for American consumers. And while there is broad consensus about the inflationary effect of tariffs, it's unclear how exactly that effect will play out. Will the additional levies create a brief inflation surge after which the inflation rate will return to its current level? Or will inflation be elevated for a longer period? Either way, the effect will likely be painful for consumers, who are still reeling from the effects of the inflation crisis.

The past two and a half years of elevated inflation have left Americans with high prices. And while the rate of inflation has recently come down to 2.3 percent, or the lowest level since February 2021, consumer prices have continued to climb and are now 23.6 percent higher than they were in January 2020, just before the start of the Covid-19 pandemic. So with the price level permanently elevated like that, even a brief burst of inflation caused by tariffs would inflict major pain on U.S. consumers because prices are already so high.

Whenever we're discussing inflation coming down, it’s important to distinguish between disinflation and deflation. What we’ve seen over the past two years is disinflation, i.e. a deceleration of price increases (yes, increases), or - mathematically speaking - a negative second derivative of consumer prices. For the overall price level to actually come down, the first derivative,i.e. the inflation rate itself would have to drop below zero, which would signify deflation. While the Fed desperately fought for inflation to decelerate, it is aiming for 2 percent inflation, not deflation, because the latter creates a whole set of problems on its own.