Tariffs and Inflation: The St. Louis Fed's Warning

The St. Louis Fed's President, Alberto Musalem, has issued a stark warning: the U.S. economy is at risk of more persistent inflation due to the recent wave of tariffs imposed by President Trump. This comes as the economy continues to expand at a moderate pace, but with risks skewed towards further cooling in the labor market and inflation remaining above 2% or possibly rising near term.

The tariffs, which have been a central part of Trump's trade policy, are expected to have a significant impact on the U.S. economy. According to the St. Louis Fed, the tariffs imposed by Trump and retained by Biden are estimated to reduce long-run GDP by 0.2 percent, the capital stock by 0.1 percent, and employment by 142,000 full-time equivalent jobs. This reduction in economic activity could lead to higher prices for goods and services, contributing to inflation.

The sectors likely to be most affected by these changes include manufacturing, automotive, and construction. For instance, the tariffs on steel and aluminum have already led to higher prices for these materials, which are used as inputs in many manufacturing processes. This has resulted in increased costs for businesses, which may pass these costs on to consumers in the form of higher prices for finished goods. Similarly, the automotive sector is likely to be affected by tariffs on imported vehicles and parts, which could lead to higher prices for cars and trucks. The construction sector is also likely to be affected by tariffs on imported materials such as lumber and copper, which could lead to higher costs for building and renovating homes and other structures.

The potential economic consequences of the tariffs on U.S. GDP, employment, and consumer prices are significant and multifaceted. According to the information provided, the tariffs imposed by President Trump are expected to have a negative impact on the U.S. economy.

Firstly, the tariffs are estimated to reduce U.S. GDP by 0.4 percent and hours worked by 309,000 full-time equivalent jobs, before accounting for foreign retaliation. This is a direct result of the increased costs of imported goods, which can lead to higher prices for consumers and businesses, reducing overall demand and economic activity. Additionally, the tariffs on Canada, China, and Mexico are expected to add as much as 0.8 percentage point to core (excluding food and energy) inflation. This increase in inflation can further erode purchasing power and reduce consumer spending, leading to a decrease in GDP.

Secondly, the tariffs are expected to have a negative impact on employment. The reduction in hours worked by 309,000 full-time equivalent jobs is a direct result of the increased costs of imported goods, which can lead to higher prices for consumers and businesses, reducing overall demand and economic activity. Additionally, the tariffs on Canada, China, and Mexico are expected to add as much as 0.8 percentage point to core (excluding food and energy) inflation. This increase in inflation can further erode purchasing power and reduce consumer spending, leading to a decrease in employment.

Thirdly, the tariffs are expected to have a negative impact on consumer prices. The tariffs on Canada, China, and Mexico are expected to add as much as 0.8 percentage point to core (excluding food and energy) inflation. This increase in inflation can further erode purchasing power and reduce consumer spending, leading to a decrease in GDP and employment.

Finally, the tariffs are expected to have a negative impact on investment decisions in the near future. The increased uncertainty and higher costs of imported goods can deter private sector investment, as businesses may be hesitant to invest in new projects or expand their operations. Additionally, the tariffs on Canada, China, and Mexico are expected to add as much as 0.8 percentage point to core (excluding food and energy) inflation. This increase in inflation can further erode purchasing power and reduce consumer spending, leading to a decrease in GDP and employment, and making it more difficult for businesses to access capital and invest in new projects.



The tariffs imposed by President Trump are expected to have a significant impact on the long-term inflation rate in the U.S. economy. According to the St. Louis Fed, the tariffs imposed by Trump and retained by Biden are estimated to reduce long-run GDP by 0.2 percent, the capital stock by 0.1 percent, and employment by 142,000 full-time equivalent jobs. This reduction in economic activity could lead to higher prices for goods and services, contributing to inflation. Additionally, the tariffs are expected to raise consumer prices, as importers typically pass along a share of the tax burden to consumers. For example, an additional 25 percent tariff on goods from Canada and Mexico combined with an additional 10 percent tariff on goods from China could add as much as 0.8 percentage point to core (excluding food and energy) inflation. This is because tariffs increase the cost of imported goods, which are then passed on to consumers in the form of higher prices.

The sectors likely to be most affected by these changes include manufacturing, automotive, and construction. For instance, the tariffs on steel and aluminum have already led to higher prices for these materials, which are used as inputs in many manufacturing processes. This has resulted in increased costs for businesses, which may pass these costs on to consumers in the form of higher prices for finished goods. Similarly, the automotive sector is likely to be affected by tariffs on imported vehicles and parts, which could lead to higher prices for cars and trucks. The construction sector is also likely to be affected by tariffs on imported materials such as lumber and copper, which could lead to higher costs for building and renovating homes and other structures.

The tariffs imposed by President Trump are expected to have a significant impact on the long-term inflation rate in the U.S. economy. According to the St. Louis Fed, the tariffs imposed by Trump and retained by Biden are estimated to reduce long-run GDP by 0.2 percent, the capital stock by 0.1 percent, and employment by 142,000 full-time equivalent jobs. This reduction in economic activity could lead to higher prices for goods and services, contributing to inflation. Additionally, the tariffs are expected to raise consumer prices, as importers typically pass along a share of the tax burden to consumers. For example, an additional 25 percent tariff on goods from Canada and Mexico combined with an additional 10 percent tariff on goods from China could add as much as 0.8 percentage point to core (excluding food and energy) inflation. This is because tariffs increase the cost of imported goods, which are then passed on to consumers in the form of higher prices.

The sectors likely to be most affected by these changes include manufacturing, automotive, and construction. For instance, the tariffs on steel and aluminum have already led to higher prices for these materials, which are used as inputs in many manufacturing processes. This has resulted in increased costs for businesses, which may pass these costs on to consumers in the form of higher prices for finished goods. Similarly, the automotive sector is likely to be affected by tariffs on imported vehicles and parts, which could lead to higher prices for cars and trucks. The construction sector is also likely to be affected by tariffs on imported materials such as lumber and copper, which could lead to higher costs for building and renovating homes and other structures.

In conclusion, the tariffs imposed by President Trump are expected to have a significant impact on the U.S. economy, with potential consequences for GDP, employment, and consumer prices. The increased uncertainty and higher costs of imported goods can deter private sector investment, as businesses may be hesitant to invest in new projects or expand their operations. Additionally, the tariffs on Canada, China, and Mexico are expected to add as much as 0.8 percentage point to core (excluding food and energy) inflation. This increase in inflation can further erode purchasing power and reduce consumer spending, leading to a decrease in GDP and employment, and making it more difficult for businesses to access capital and invest in new projects.

Ask Aime: How will the tariffs imposed by President Trump affect the U.S. economy in the long run?