Finance
Tariffs cause a slight temporary increase in inflation
Don Boudreaux writes:
Unlike you think Duncan Braids May 6e tirade against proponents of free trade ‘devastating’, I think it’s tendentious. Braid writes triumphantly as if he has caught us free traders in yet another of our Keystone Kops antics – especially here, our attempt to blame tariffs for inflation. Yet no competent economist or free trade advocate is guilty of this ridiculous charge. If so, Braid’s evidence of free traders’ belief that tariffs cause inflation would consist of more than a single link to a piece in, of all places, Vox.
If inflation means an increase in the money supply, then no, rates do not cause inflation.
If inflation means higher sustained growth in the price level, then no, rates do not cause inflation.
But if inflation means an increase in the price level, then yes: tariffs Doing cause inflation.
One of the equations I have found most useful in understanding macroeconomics is MV = Py. (M is the quantity of money, whether it is M1, M2 or some other M; V is the velocity of money; P is the price level; y is real income.)
Adding a tariff makes the economy less efficient, causing real income to be lower than it would otherwise be. Imagine that many additional rates are added and that the real income is therefore 0.5 percentage points lower than otherwise. That’s a lot by the way. If M and V are then not affected, the price level P will be 0.5 percentage points higher than otherwise. QED.
Does this mean that adding tariffs is a major cause of inflation? Of course not. 0.5 percentage points in a given year (the year the rates are added) is a small fraction of the 3 or 4 percent inflation rate. 0.5 percentage point, on top of three years of inflation averaging more than 4 percent per year, is a rounding error.
