In a detailed economic assessment, Paul Krugman examines the tangible effect that recent trade tariffs have exerted on consumer price inflation in the United States. By utilizing fiscal data and price indices, Krugman illustrates that the increase in tariffs corresponds to a near 0.8 percentage point elevation in the inflation rate — an insight that demystifies prior speculation over inflation behavior amidst trade policy changes.
Krugman addresses a perceived economic 'mystery' regarding why inflation did not escalate more sharply following the imposition of higher tariffs. His analysis employs customs duties as a proportion of gross domestic product (GDP) to gauge their fiscal impact. This ratio increased from an approximate 0.3% of GDP before the tariff implementation to around 1.1% afterward, marking a rise of 0.8 percentage points. This figure serves as a foundational estimate of the tariffs' inflationary consequences.
The inflationary effect is further substantiated by findings from the Harvard Business School's Pricing Lab, which estimates that the Consumer Price Index (CPI) has increased by roughly 0.8 percentage points due to tariffs. These data align closely with current projections of core Personal Consumption Expenditures (PCE) inflation for 2025, which stand at 3%. This projected inflation rate exceeds pre-tariff forecasts of 2.2% by the same margin, bolstering the argument that tariffs have exerted a clear upward pressure on inflation.
Despite minor variations inherent in economic modeling, Krugman emphasizes the coherence and precision of these inflation estimates, describing them as "almost too neat." He asserts that the modest inflation increase directly correlates with the effective tariff rates — a nuance often obscured by discussions focusing on headline tariff figures rather than actual implementation and corporate responses.
Krugman critiques a common narrative propagated by supporters of former President Trump, which suggests that economists and experts inaccurately forecasted tariff impacts. He characterizes this perspective as a "straw man," arguing that these proponents overlook the difference between the nominal tariff rates announced publicly and the "effective rates" that result after considering exemptions, exclusions, and corporate strategies.
High tariff levels incentivized firms to pursue exemptions that were already legally available but largely unused when tariffs were lower due to administrative complexities. Examples include Apple's exemption from tariffs on imports from India and an increase in claims under the United States-Mexico-Canada Agreement (USMCA) for goods from Canada and Mexico. These carve-outs and exemptions have subdued the tariffs' inflationary effect by limiting their reach.
Regarding broader economic indicators, major U.S. stock indices displayed mixed performance during the referenced week. The S&P 500 index posted a modest gain of 0.23% over five trading sessions. In contrast, the Nasdaq Composite and the Dow Jones Industrial Average experienced declines of 0.29% and 0.50%, respectively. Exchange-traded funds (ETFs) following these indices mirrored these trends; for instance, the SPDR S&P 500 ETF Trust (NYSE:SPY) closed down 0.30% at $691.97, while the Invesco QQQ Trust (NASDAQ:QQQ) retreated by 1.20% to $621.87.
This nuanced economic context underscores the complexity behind quantifying and interpreting the effects of tariff policies on inflation and market behavior. Krugman's analysis provides clarity on the specific magnitude of inflation attributable to tariffs and challenges oversimplified narratives that either downplay or exaggerate these effects.