Cooling inflation doesn't mean tariffs were harmless

Early last year, President Donald Trump rolled out the highest tariff rates in more than a century, promising that they would boost government revenue and negotiating leverage with no effects on inflation nor other collateral damage. After a dizzying series of changes, many of them implemented haphazardly through social media decree, the duties are — depending on the measure you use — somewhere on the order of the highest in eight decades. And we now have the data in hand to thoroughly disprove the notion that the policy gambit would prove pain free.

It may not have caused a recession or a widespread inflation spike — as a few Cassandras predicted — but it has still hit small businesses and consumers living paycheck to paycheck particularly hard. And it’s having an enduring impact on borrowing costs and real incomes, not to mention America’s standing with allies and trading partners around the world.

Mercifully though, the effect on consumer prices in the U.S. seems to have peaked. Core goods inflation — the most tariff-exposed area of the consumer price index — is clearly cooling on a three-month annualized basis.

In the broadest sense, core goods inflation started taking off as Trump assumed office and hit its stride several months after the April 2 "Liberation Day" tariffs, finally peaking in September at about 1.5% year-over-year.

To put that in context, core goods make up about a fifth of the CPI, and prices typically move sideways or even exhibit modest deflation. At the height of tariff inflation, they contributed 29 basis points to reported CPI inflation. For his part, Federal Reserve Bank of New York President John Williams estimates that the tariff impacts were slightly larger than that, adding around half a percentage point to reported inflation. In other words, December’s 2.7% CPI inflation would probably have been somewhere in the vicinity of 2.2%-2.4% without the tariffs(1).

For Americans still trying to claw their way back from the cost-of-living surge of 2021-2023, that half-percentage point or so of extra inflation has certainly played a role in delaying their recovery. Inflation-adjusted average hourly earnings ended up growing 1.1% in 2025 — far from terrible, but ultimately exactly the same as the growth rate in the final year of Joe Biden’s presidency.

At the product level, the extra inflation has hit essentials that make up an outsized part of the budget for lower-income families. As key examples, consider the jumps in the prices of children’s clothing; tools and outdoor equipment; furniture and bedding; and motor vehicle parts.

The duties were also a major factor in the Federal Reserve’s cautious approach to rate cuts. Although several policymakers have advocated for "looking through" short-lived tariff effects, some members of the Fed’s rate-setting committee worried — and understandably so — that the duties would de-anchor the public’s inflation expectations given recent memories of surging prices. Those attitudes, they feared, would prove self-fulfilling. Prior to Trump’s election victory, economists surveyed by Bloomberg broadly expected the Fed funds rate to be around 3%-3.25% by now. In reality, they’re half percentage point higher.

Ultimately then, the duties have probably contributed to higher borrowing costs for homebuyers, businesses and the U.S. government through 2025. Even now, economists expect rates this year to stay somewhat above where they might have been under the "no tariffs" counterfactual scenario.

Among businesses, the outcomes have varied widely by size. The large companies represented on the S&P 500 Index have, on the whole, held up better than you might have expected, thanks to their privileged access to Washington lobbyists and their bargaining power with suppliers. Small businesses, on the other hand, have taken the brunt of the policy shift and the uncertainty over how long it will last. According to the ADP National Employment report, private payrolls have been flat-to-negative in the past year for companies with fewer than 50 employees.

And even among publicly traded companies, corporate fortunes haven’t been uniform. As the S&P 500 has powered back to a record high, companies in the consumers goods, apparel and furniture businesses have struggled to find their footing.

Many of the administration’s boosters have focused on the fact that the U.S. hasn’t fallen into recession, nor has it experienced a major spike in headline inflation. But that’s mostly a function of the underlying trends that were already in place before the Trump administration: The U.S. economy was benefiting from a surge in artificial intelligence spending and bearing the disinflationary fruits of the Fed’s patient monetary policy since 2022.

Even after Trump’s "Liberation Day" tariffs on April 2, very few economists ever put a recession in their baseline forecasts, and almost none of them projected an inflation resurgence much above 4%. In fact, it was partially because Trump moderated some of his original policies that the actual outcome for consumer prices wasn’t worse.

All told, tariffs have still strained household budgets, driven up the cost of money and hampered the dynamism of American businesses. Yes, I’m grateful the damage wasn’t worse, but the fact that we dodged a self-inflicted catastrophe is nothing to celebrate.

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(1) PCE, the Fed's preferred inflation gauge, hasn't yet been released for the month of December.

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Jonathan Levin is a columnist focused on U.S. markets and economics. Previously, he worked as a Bloomberg journalist in the U.S., Brazil and Mexico. He is a CFA charterholder.