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Prices rising due to tariffs isn't "inflation" in any traditional sense. It's not driven by consumer demand, and therefore the logic for raising rates (i.e. slo

by timr 2y ago

Prices rising due to tariffs isn't "inflation" in any traditional sense. It's not driven by consumer demand, and therefore the logic for raising rates (i.e. slowing economic growth by reducing money in the market) doesn't apply.

sandworm101 2y ago
>> rising due to tariffs isn't "inflation" in any traditional sense. Perhaps not in an academic sense, but the vast majority of people understand inflation as a rise in the cost of living, no matter the root cause.
- rayiner 2y ago
  Yes, but the point being made above is about the reaction of the bond market vis a vis refinancing the debt, not consumers.
  - mattnewton 2y ago
    You can’t isolate these things, the Fed’s charter is to try and reduce inflation for consumers not regulate the bond market for the US debt, but their interest rates and repo actions move the bond market.
ethbr1 2y ago
Coupled with tax cuts?
tananaev 2y ago
It doesn't matter what the root cause of increasing prices is. Fed doesn't have any other levers but to adjust rates up to reduce demand. It will work either way because even if demand is not the source, it will reduce whatever demand that was there.
scottiebarnes 2y ago
If the consumer price index, which is a metric the Fed uses, goes up, then inflation has gone up. Every dollar buys you less (less purchasing power), and the nominal price has increased. To me this indicates inflation. Of course, you need to calculate how this balances out in terms of jobs/wages and the flow of investment, but that's really hard to figure out at this point in time. I'd expect the CPI to go up in the event of global tariffs at a baseline of 10% assuming all things go ahead as described.
- timr 2y ago
  Yes, that's fine. But if the acute cause is not consumer demand, raising interest rates won't do anything. (Note: a sibling comment suggests that it "doesn't matter", because if you slow the economy enough, you'll offset the artificial "inflation" due to tariffs. Maybe so. But that would be cutting off your arm to treat a paper cut.)
  - adgjlsfhk1 2y ago
    calling 50% tarrifs on all of easy Asia is hardly a paper cut. it's more breaking someone's ribs while giving them CPR
    - SpaceNoodled 2y ago
      It's more like breaking your own ribs while breaking someone else's ribs, no CPR involved.
      - TeMPOraL 2y ago
        It gets extra confusing when considering import/export of ribs.
  - resters 2y ago
    Inflation is just a description of price movement, nothing more.
  - patates 2y ago
greybox 2y ago
If a pair of shoes today costs $30, and a pair of shoes tomorrow costs $60 (not saying this will happen, just positing a scenario), from a consumer perspective, there has been 100% inflation in the price of shoes. It doesn't matter that the price increase is due to tarrifs on imports from Vietnam.
- FredPret 2y ago
  Yes and there will be the usual political consequences associated with inflation; but this type of inflation is caused by a tax and cannot be combated by raising interest rates.
  - sroussey 2y ago
    It most certainly can, though you would have to push interest rates much higher than normal to kill demand enough to have an effect.
  - SpaceManNabs 2y ago
    This is blatantly false. You just have to look at Jerome Powell's reasoning in 2018-2019 and just last month!
  - ElevenLathe 2y ago
    Why wouldn't a rate hike make a difference? It will lower demand and therefore prices, no? I mean, this isn't really something that we should celebrate or want, since it essentially just means discouraging people from buying shoes because they can't afford it, but it does bring the prices down (or at least slow the rate of shoe price increase).
    - FredPret 2y ago
      True but that mechanism is indirect at best. Usually high interest rates discourages more borrowing and lowers spending that way. But in this case the price increase is already due to the government putting its thumb on the scale. The best way to reduce the price is not via the Rube Goldberg interest rate mechanism to shrink spending and thus demand for the $60 shoe, but by removing the tariff and make it a $30 shoe immediately.
scotty79 2y ago
It doesn't matter what causes inflation. It's always a sign that there's more money than is needed for current and anticipated levels of economic activity. And the correct course of action is always to raise the rates to reduce the pace that the money is printed at. At least if you care about avoiding hyperinflation.
pragmatic 2y ago
That's a distinction without a difference. Oil price shocks in the 70s caused stagflation, a very real threat now. The solution then was massive pain (Volker) that seemed to slay the beast.
Spooky23 2y ago
Inflation is inflation. The fact that we decided allow a massive tax increase by executive fiat is irrelevant. The fact that we’re risking a death spiral from decreased consumer demand via government imposed inflation is irrelevant. You’re right in that the usual formula of turning the knobs on interest rates to ease economic challenges is unlikely to work. We may have to turn the knobs to prevent a total death spiral, however. Get ready for 16% mortgages.
cco 2y ago
Didn't stop the Fed last time, when inflation was due to market control letting companies pick their own price (also not "real" inflation).
croemer 2y ago
Actually, price increases caused by tariffs are a type of inflation—specifically, cost-push inflation. This is consistent with standard definitions found in macroeconomics and international economics textbooks.
dragonwriter 2y ago
> Prices rising due to tariffs isn't "inflation" in any traditional sense. Yes, consumer prices rising is inflation in the traditional sense (since, unqualified, “inflation” refers to increases in consumer prices.) > It's not driven by consumer demand, Inflation is not restricted to demand-pull inflation, which is why the term “demand-pull inflation” has a reason to exist. Tariff-driven price increases are a form of cost-push inflation. > and therefore the logic for raising rates (i.e. slowing economic growth by reducing money in the market) doesn't apply. The existence of cost-push inflation doesn't change the short-term marginal effects of monetary policy on prices, so of you care just about near-term price levels, the same monetary interventions make sense as for demand-pull inflation. OTOH, beyond short-term price effects things are very different: demand-pull inflation frequently is a symptom of strong economic growth and cooling the economy can still be consistent with acceptable growth. Cost-push inflation tends to be an effect of forces outside of monetary policy which tend to slow the economy, so throwing tight money policy on top of it accelerates the slowdown. This is particularly bad if you are already in a recession with cost-push inflation (stagflation). The good thing, such as it is, about cost-push inflation where the cost driver is a clear policy like tariffs, is that while monetary policy has no good option to fix it, there is a very clear policy solution—stop the policy that is driving the problem. The problem is when there is irrational attachment to that policy in the current government.
- timr 2y ago
  You're just using new terms ("cost-push inflation") to disagree without actually disagreeing. > so of you care just about near-term price levels, the same monetary interventions make sense as for demand-pull inflation....Cost-push inflation tends to be an effect of forces outside of monetary policy which tend to slow the economy, so throwing tight money policy on top of it accelerates the slowdown. This is particularly bad if you are already in a recession with cost-push inflation (stagflation). Again, you're just saying the same thing that I wrote above, but arguing (?) that it's actually called "inflation". If your point is that tariffs are bad, fine. We both agree that what you call "cost-push inflation" is not something you'd rationally raise interest rates to counter.
  - 2y ago
Zamaamiro 2y ago
There's nothing in the definition of inflation that says it needs to be driven by consumer demand.
EasyMark 2y ago
Inflation is definitely going to happen due to tariffs. If I'm paying 20% more next year on average for products above what I'm currently paying that is 20% inflation for me, that is what people will see; they don't care about your purist form of inflation arguments. They also vote against people who cause inflation, especially when they promised the opposite.

by timr 2y ago

sandworm101 2y ago

>> rising due to tariffs isn't "inflation" in any traditional sense. Perhaps not in an academic sense, but the vast majority of people understand inflation as a rise in the cost of living, no matter the root cause.

rayiner 2y ago
Yes, but the point being made above is about the reaction of the bond market vis a vis refinancing the debt, not consumers.
- mattnewton 2y ago
  You can’t isolate these things, the Fed’s charter is to try and reduce inflation for consumers not regulate the bond market for the US debt, but their interest rates and repo actions move the bond market.

ethbr1 2y ago

Coupled with tax cuts?

tananaev 2y ago

It doesn't matter what the root cause of increasing prices is. Fed doesn't have any other levers but to adjust rates up to reduce demand. It will work either way because even if demand is not the source, it will reduce whatever demand that was there.

scottiebarnes 2y ago

If the consumer price index, which is a metric the Fed uses, goes up, then inflation has gone up. Every dollar buys you less (less purchasing power), and the nominal price has increased. To me this indicates inflation. Of course, you need to calculate how this balances out in terms of jobs/wages and the flow of investment, but that's really hard to figure out at this point in time. I'd expect the CPI to go up in the event of global tariffs at a baseline of 10% assuming all things go ahead as described.

timr 2y ago
Yes, that's fine. But if the acute cause is not consumer demand, raising interest rates won't do anything. (Note: a sibling comment suggests that it "doesn't matter", because if you slow the economy enough, you'll offset the artificial "inflation" due to tariffs. Maybe so. But that would be cutting off your arm to treat a paper cut.)
- adgjlsfhk1 2y ago
  calling 50% tarrifs on all of easy Asia is hardly a paper cut. it's more breaking someone's ribs while giving them CPR
  - SpaceNoodled 2y ago
    It's more like breaking your own ribs while breaking someone else's ribs, no CPR involved.
    - TeMPOraL 2y ago
      It gets extra confusing when considering import/export of ribs.
- resters 2y ago
  Inflation is just a description of price movement, nothing more.
- patates 2y ago

greybox 2y ago

If a pair of shoes today costs $30, and a pair of shoes tomorrow costs $60 (not saying this will happen, just positing a scenario), from a consumer perspective, there has been 100% inflation in the price of shoes. It doesn't matter that the price increase is due to tarrifs on imports from Vietnam.

FredPret 2y ago
Yes and there will be the usual political consequences associated with inflation; but this type of inflation is caused by a tax and cannot be combated by raising interest rates.
- sroussey 2y ago
  It most certainly can, though you would have to push interest rates much higher than normal to kill demand enough to have an effect.
- SpaceManNabs 2y ago
  This is blatantly false. You just have to look at Jerome Powell's reasoning in 2018-2019 and just last month!
- ElevenLathe 2y ago
  Why wouldn't a rate hike make a difference? It will lower demand and therefore prices, no? I mean, this isn't really something that we should celebrate or want, since it essentially just means discouraging people from buying shoes because they can't afford it, but it does bring the prices down (or at least slow the rate of shoe price increase).
  - FredPret 2y ago
    True but that mechanism is indirect at best. Usually high interest rates discourages more borrowing and lowers spending that way. But in this case the price increase is already due to the government putting its thumb on the scale. The best way to reduce the price is not via the Rube Goldberg interest rate mechanism to shrink spending and thus demand for the $60 shoe, but by removing the tariff and make it a $30 shoe immediately.

scotty79 2y ago

It doesn't matter what causes inflation. It's always a sign that there's more money than is needed for current and anticipated levels of economic activity. And the correct course of action is always to raise the rates to reduce the pace that the money is printed at. At least if you care about avoiding hyperinflation.

pragmatic 2y ago

That's a distinction without a difference. Oil price shocks in the 70s caused stagflation, a very real threat now. The solution then was massive pain (Volker) that seemed to slay the beast.

Spooky23 2y ago

Inflation is inflation. The fact that we decided allow a massive tax increase by executive fiat is irrelevant. The fact that we’re risking a death spiral from decreased consumer demand via government imposed inflation is irrelevant. You’re right in that the usual formula of turning the knobs on interest rates to ease economic challenges is unlikely to work. We may have to turn the knobs to prevent a total death spiral, however. Get ready for 16% mortgages.

cco 2y ago

Didn't stop the Fed last time, when inflation was due to market control letting companies pick their own price (also not "real" inflation).

croemer 2y ago

Actually, price increases caused by tariffs are a type of inflation—specifically, cost-push inflation. This is consistent with standard definitions found in macroeconomics and international economics textbooks.

dragonwriter 2y ago

> Prices rising due to tariffs isn't "inflation" in any traditional sense. Yes, consumer prices rising is inflation in the traditional sense (since, unqualified, “inflation” refers to increases in consumer prices.) > It's not driven by consumer demand, Inflation is not restricted to demand-pull inflation, which is why the term “demand-pull inflation” has a reason to exist. Tariff-driven price increases are a form of cost-push inflation. > and therefore the logic for raising rates (i.e. slowing economic growth by reducing money in the market) doesn't apply. The existence of cost-push inflation doesn't change the short-term marginal effects of monetary policy on prices, so of you care just about near-term price levels, the same monetary interventions make sense as for demand-pull inflation. OTOH, beyond short-term price effects things are very different: demand-pull inflation frequently is a symptom of strong economic growth and cooling the economy can still be consistent with acceptable growth. Cost-push inflation tends to be an effect of forces outside of monetary policy which tend to slow the economy, so throwing tight money policy on top of it accelerates the slowdown. This is particularly bad if you are already in a recession with cost-push inflation (stagflation). The good thing, such as it is, about cost-push inflation where the cost driver is a clear policy like tariffs, is that while monetary policy has no good option to fix it, there is a very clear policy solution—stop the policy that is driving the problem. The problem is when there is irrational attachment to that policy in the current government.

timr 2y ago
You're just using new terms ("cost-push inflation") to disagree without actually disagreeing. > so of you care just about near-term price levels, the same monetary interventions make sense as for demand-pull inflation....Cost-push inflation tends to be an effect of forces outside of monetary policy which tend to slow the economy, so throwing tight money policy on top of it accelerates the slowdown. This is particularly bad if you are already in a recession with cost-push inflation (stagflation). Again, you're just saying the same thing that I wrote above, but arguing (?) that it's actually called "inflation". If your point is that tariffs are bad, fine. We both agree that what you call "cost-push inflation" is not something you'd rationally raise interest rates to counter.
- 2y ago

Zamaamiro 2y ago

There's nothing in the definition of inflation that says it needs to be driven by consumer demand.

EasyMark 2y ago

Inflation is definitely going to happen due to tariffs. If I'm paying 20% more next year on average for products above what I'm currently paying that is 20% inflation for me, that is what people will see; they don't care about your purist form of inflation arguments. They also vote against people who cause inflation, especially when they promised the opposite.