I wanted to drop a quick note about recent CPI data and how tariffs are impacting inflation. There is a fundamental misunderstanding (aka political spin) about this.
It won’t take very much math to put the effect of tariffs into a broader context.
The United States is a ~$30 trillion economy; 70% of this annual activity is consumer spending. And, more than half of that is Services spending.
Imported physical goods account for less than $4 trillion, or approximately 13% of the overall economy.1
A 10-20% tariff/tax on these goods is ~$350B to $700B. Even a 30% tariff on every country in the world is less than a trillion dollars. The potnetial damage is large, but what we have seen so far is not recession-inducing by itself.
The problem is that this pile of cash has to come from somewhere. As it turns out, there are only three places it could come from: 1) Producers (exporters), 2) Consumers, and 3) Domestic companies (Manufacturers, Importers, and/or Retailers).
The producer/exporters could lower prices to offset tariffs, or the consumer can pay higher prices, or US companies could lower their margins. It’s most likely to be some combination of all three, but I suspect that consumers will bear the biggest brunt of it.
The problem: Tariffs act as a tax on consumption. Any additional dollar spent on tariffs is a dollar that is not spent elsewhere. That reduces overall consumer spending and slows economic growth.
For Corporate America, reductions in margins negatively impact profits. Tariffs make corporate America suffer lower revenues and reduced profits.2
So far, we have seen only a muted impact on the economy. The tariffs have barely been in effect for a single quarter. Most tariffs are not in place (yet), and we have only a few months of data so far. Once we have a full year’s worth of results, we will see far more data and likely more visible effects from what is effectively a VAT tax on consumption.
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The US economy has proven itself to be both robust and resilient. But any money raised by tariffs will affect consumption and profits.
Past experiments with tariffs have shown that they are a net negative on the economy and one of the least efficient ways to raise tax revenues.
We will find out just how much of a negative they are over the next few quarters…
Previously:
Are Tariffs a New US VAT Tax? (March 31, 2025)
7 Increasing Probabilities of Error (February 24, 2025)
See also:
The Economy Seems Healthy. Were the Warnings About Tariffs Overblown?
By Ben Casselman
New York Times, July 16, 2025
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1. Note: Imports get subtracted from GDP…
2. Either stocks become pricier or prices fall…
