By making imported goods more expensive, tariffs encourage consumers to buy domestically produced alternatives, which generate government revenues to provide a source of income for the government. Tariffs, too, can be used in response to unfair trade practices by other nations. While tariffs can achieve these objectives, they also have consequences for prices, wages and overall economic stability, making them a focal point in any prismatic discussion on inflation.

Tariffs directly increase the price of imported goods by the amount of the tax imposed. For example, if a government imposes a 10% tariff on imported steel, the cost of steel rises accordingly. This increase in costs can lead to higher prices for consumers and businesses that rely on imported materials.

When businesses face higher costs due to tariffs, they often pass most of these costs on to consumers. This results in increased prices for goods and services, contributing to overall inflation. In addition, many industries depend on imported raw materials and intermediate goods. Tariffs raise the costs of these inputs, leading to higher production expenses and, ultimately, higher consumer prices.

Tariffs often target specific industries, such as steel, aluminum and electronics. When tariffs drive up costs in these industries, related products (e.g., automobiles or appliances) also become more expensive, contributing to inflation in particular sectors.

Beyond the direct increase in prices, tariffs can have broader macroeconomic effects that contribute to inflation. Tariffs can alter global supply chains, making it more expensive or difficult for businesses to obtain materials and products from traditional sources. Companies may need to find alternative suppliers, which can lead to inefficiencies and increased costs. Disruptions can create shortages, further driving up prices. Tariffs can reduce competition by limiting the number of foreign goods available in the market. With fewer choices, domestic producers may increase prices, leading to inflationary pressures. Reduced competition can also lower incentives for efficiency and innovation, potentially leading to sustained higher prices.

The broader research is mixed. Research by the National Bureau of Economic Research found that tariffs tend to have inflationary effects, particularly when they target broad categories of goods. The Federal Reserve has noted that tariffs can contribute to short-term inflation but that their long-term effects depend on factors, such as monetary policy and global supply chains.

Going back to the Great Depression in the 1930s, the Smoot-Hawley Tariff imposed high duties on imports. While its primary effect was a decline in international trade, it also led to higher prices for imported goods. However, the overall economic downturn and deflationary pressures outweighed inflationary effects at the time.

In 2018, the U.S. imposed tariffs on Chinese imports for steel and aluminum as well as consumer electronics and apparel. China retaliated with its own tariffs on U.S. exports, escalating trade tensions. Studies found that U.S. businesses and consumers bore most tariff costs, leading to higher prices for goods such as washing machines and automobiles. The U.S. inflation rate increased modestly, but other factors (e.g., monetary policy and economic conditions) also played a role in price changes.

While tariffs can contribute to inflation, arguments suggest that their impact is not always significant. Some businesses choose to absorb higher costs rather than pass them on to consumers. This is more likely when competition is strong and companies fear loss of market share. If tariffs lead to reduced economic growth or weaker consumer demand, deflationary pressures can counterbalance inflation. In some cases, tariffs have coincided with economic slowdowns, limiting their inflationary impact. Consumers and businesses may shift to domestic alternatives, which could stabilize prices if domestic production is efficient.

In conclusion, tariffs can cause inflation by raising prices for imported goods, increasing production costs and disrupting supply chains. Empirical evidence suggests that tariffs often contribute to short-term inflation, though their long-term impact depends on various economic conditions. While tariffs serve policy objectives such as protecting domestic industries, they come with trade-offs, including potential inflationary pressures. Policymakers must carefully consider these effects when designing trade policies to balance economic stability with national interests.

About the author: Michael J. Paton is a portfolio manager at Tocqueville Asset Management L.P. He can be reached at 212-698-0800 or by email at [email protected].

Published: April 17, 2025.