The protectionist president didn’t overheat the economy. He cooled it
It was meant to be an economic morality tale. You raise tariffs, inflation goes up, and the markets punish the populist saboteur. Except, awkwardly, it hasn’t turned out that way. President Donald Trump has hoisted the US tariff regime to heights not seen since the interwar period. His “Liberation Day” tariffs layered fresh duties across autos, semiconductors, steel, and virtually every Chinese import. Analysts predicted price shocks, policy chaos, and renewed inflationary heat. Instead, the latest CPI data show the opposite. Core inflation in May clocked in at 2.8 per cent. In April, it was 2.5 per cent, the lowest since March 2021. Headline inflation is even lower. If President Trump were aiming to relight the fire, he has a strange way of going about it.
This isn’t just a curiosity. It’s a direct challenge to the standard inflation narrative. The theory, dutifully parroted by every spreadsheet economist from the Peterson Institute to the Financial Times, is that tariffs function like a tax on consumers. Import prices go up, retail prices follow, and inflation gains momentum. But that presumes a chain reaction that no longer exists.
First, the pass-through from tariffs to prices has been stubbornly incomplete. Some of this is basic behavioural economics: exporters, particularly in Asia, often absorb part of the tariff cost to protect their US market share. Pricing power is asymmetric. American importers, especially in consumer durables, have alternatives. The US dollar’s relative strength has further offset foreign price increases, helping to mute cost pressures. There’s also time-lag and substitution: businesses have now spent years building diversified supply chains and stockpiling input buffers. Trade elasticity is higher than it used to be.
Western economic orthodoxy rests on the fiction that low tariffs are a condition for macroeconomic stability
Second, the composition of inflation itself has changed. Post-pandemic price pressures came primarily from supply-chain dislocations and labour-market tightness, especially in services. That’s where inflation has proven sticky, and that’s where it’s now receding. The goods side of CPI, which is where tariffs bite, has remained tame or outright deflationary. Analysts at J.P. Morgan and Barclays note that retail inventories are strong, shipping rates are down, and goods inflation has largely flatlined. Tariffs alone can’t disrupt a segment of the economy already characterised by weak demand and intense competition.
This matters because most of the inflation “reacceleration” concerns, loudly voiced by Fed-sceptics and bond traders alike, assume that tariffs inject cost-push shocks that the Fed must then counteract with tighter policy. But the Fed, under Chairman Jerome Powell, hasn’t taken that bait. Last week it held rates steady at 4.25 — 4.50 per cent, for the fourth straight meeting. Powell’s press conference was an exercise in polite defiance: the Fed would act based on incoming data, not Beltway theatre. Core PCE remains on a downward path. The idea that tariffs would unmoor inflation expectations simply hasn’t materialised.
This would already be enough to suggest that the inflation hawks misread the room. But there’s more. The real macroeconomic significance of President Trump’s tariffs is not their price effect but their role in a deeper structural shift. They are a blunt, but effective, instrument for reshaping the geography of production. Supply-chain diversification, nearshoring, and the return of industrial policy have all accelerated under tariff protection. American manufacturing investment is up, not down. Factory construction in strategic sectors is growing at its fastest rate since the early 1980s. Even if the efficiency cost is real, the inflationary cost is not.
And here lies the deeper point. For decades, Western economic orthodoxy has rested on a fiction: that low tariffs are a condition for macroeconomic stability. This assumption was never rooted in empirical discipline. It was ideology — market access as moral virtue, Ricardian trade models as religious text. The moment a government breaks with it, the punishment is meant to be swift: higher inflation, falling growth, market panic. Yet none of these have occurred. On the contrary, the tariff-led realignment has proven surprisingly benign. Reality, as ever, is stubborn.
Of course, none of this is to say tariffs are costless. They are distortionary, often clumsy, and prone to politicisation. But the key lesson of the last 18 months is that macroeconomic outcomes are not uniquely determined by textbook theory. They depend on institutional capacity, private-sector adaptation, and monetary credibility. The Fed deserves some credit: it stayed tight when inflation ran hot and has refused to ease prematurely. That is far more relevant to today’s disinflation than any marginal adjustment in the average tariff rate.
Which brings us to the experts. One might forgive them a forecasting error. What’s harder to overlook is their deeper misjudgement: the belief that markets are fragile things, and that politics, especially nationalist politics, must be punished. That is why Trump’s tariff agenda provoked such hysteria. It violated not just a model, but a moral code. It is also why today’s inflation numbers are so awkward. They suggest that the world is not only messier than theory allows, but that political heresy sometimes works.
There will be more tariffs, and more forecasts of doom. But for now, one can only note the irony. The protectionist president didn’t overheat the economy. He cooled it. In the end, the only thing that’s inflated is the certainty of those who said he couldn’t.
