small beer

market vibes

April 12…)

“Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Milton Friedman, India in 1963.

In the financial press this weekend, money center banks opined in unison: tariffs will be inflationary, lifting CPI to 3.5% or 4% by 2026. Even so, BLS inflation data was exceptionally dovish last week, and these same banks are forecasting as many as 5 cuts to the funds rate. How can that be with inflation at 4%?

Pundits, economists, politicians, and senior voices in the financial community have also said for years that “A tariff is a tax.” And, the aforesaid community has said repeatedly, “Tariffs are inflationary,” including Jay Powell, Rand Paul, and Columbia University’s Nobel Prize-winning Joseph Stiglitz (multiple sources: Powell, 2018; Paul, 2021; Stiglitz, 2020).

Therefore, I put this question to the reader:

If a candy bar costs $0.50 pre-tax, and the government taxes the candy bar $0.25, and the post-tax cost is 50% higher than its pre-tax cost, is that an inflationary phenomenon?

Of course not.

The candy bar’s pre-tax cost remains unchanged. The retail price is higher because the government taxes transactions. A tax is a fiscal policy action, not an increase in the money supply or nominal output. So too are tariffs a policy action. Neither has any relationship to cash in circulation or the value of GDP.

Unfolding today is a discussion framing (a perfect word) the humble tariff as the cause of imminent inflation. I think that’s nonsense, but as usual, I’ll say, “You decide.”