New York Fed Research Flags New Inflation Vector from Tariffs on China Imports

The Federal Reserve Bank of New York has recently published research highlighting a new inflation vector stemming from tariffs on Chinese imports. The study, conducted by economists at the New York Fed, suggests that tariffs on Chinese goods could have a more significant impact on US inflation than previously thought. This article explores the findings of the research and their implications for US consumers, businesses, and the broader economy.

The New York Fed's research focuses on the indirect effects of tariffs on consumer prices, which have been largely overlooked in previous studies. The economists found that most goods bearing a "Made in the USA" label contain imported components, and when these components become more expensive due to tariffs, the final consumer good will likely also become more expensive. Moreover, producers and retailers typically charge a large markup on top of costs, which can further amplify the impact of tariffs on consumer prices.

The study estimates that 6 percent of core PCE is directly imported, and 4 percent is indirectly imported, meaning that spending on direct and indirect imports accounts for 10 percent of core PCE. This suggests that tariffs on Chinese imports could have a more substantial impact on US inflation than previously thought.

The research also highlights the importance of considering how markups respond to cost changes of imported components. The New York Fed's methodology accounts for the magnitude of retail markups and considers a plausible range of assumptions about how markups will respond to import price changes. This approach allows for a more accurate estimation of the impact of tariffs on consumer prices.

The findings of the New York Fed's research have important implications for US consumers, businesses, and the broader economy. Tariffs on Chinese imports could contribute to higher inflation, potentially leading to a self-reinforcing cycle of higher prices and wages. This could have significant long-term effects on the US economy, including slower GDP growth, disrupted supply chains, job losses, and impacts on exchange rates and trade balances.

In response to the New York Fed's findings, policymakers should consider the potential long-term effects of tariffs on the US economy and take appropriate actions to mitigate these impacts. This may include adjusting tariff policies, providing targeted assistance to affected industries and workers, and communicating effectively with consumers and businesses to manage inflation expectations.

In conclusion, the New York Fed's research highlights a new inflation vector stemming from tariffs on Chinese imports, with significant implications for US consumers, businesses, and the broader economy. Policymakers should carefully consider these findings and take appropriate actions to manage the potential long-term effects of tariffs on the US economy.

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