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An Update/Reminder on Rent Inflation
A subscriber to our Quarterly Inflation Outlook (you can subscribe here) wrote to me recently and asked about a research piece put out by a major sell-side investment house that discussed how private rental indices (such as Zillow) and the Fed’s NTRR (“New Tenant Rent Index”, as defined in a paper by the Cleveland Fed’s Randall Verbrugge a couple of years ago called “Disentangling Rent Index Differences: Data, Methods, and Scope”) were indicating that a decline in rent inflation was on the way. I felt like it was time for an update on this topic, since it has been a little while since the exact same arguments made the rounds a few years ago.
I even had a podcast (Ep. 74: Inflation Folk Remedies) in July 2023 in which I discussed (among other things) the NTRR issue. So the deceleration of Zillow and the other private rent indices, the NTRR which was forecasting sharply negative rent growth (before revisions!), the supply of new rental units – all of those are arguments from 2023!
Here are rents. The black line is the actual CPI for Primary Rents, y/y. In July of 2023, it was at 8%. You may notice that it never went negative in 2023 or 2024, and isn’t showing any signs of going negative in 2025.
Before I go any further, here is sufficient reason to ignore the NTRR, in addition to the other arguments I’ll make in a bit. Here is the chart of the NTRR from the 2023 paper.
And here is the updated NTRR from Bloomberg today. You will note that the 0% print in 2023Q1 from the 2023 paper has been revised up to around 4.5%. That’s even higher than the upper edge of the error range in the prior chart.
So forgive me if I don’t panic at the -2.2% current reading of the NTRR. Here’s the problem: the conviction among economists in 2023 (not just the Fed economists, but it was a general consensus at the time that rents were about to collapse) that the “stock” of rent inflation would eventually respond to the “flow” of new rents is just not how rents work. The new rents are not indicative of new conditions while the stock isn’t…those are two totally different populations.
There are people who turn over rents and move with some frequency, or who are moving now for one reason or another, and there is a stock of open units that landlords want to fill. But just because a landlord offers a low rent to fill his one open unit has nothing to do with his desire to cut rents on all of the units that aren’t turning over.
What is amazing is that the only reason this ever looked like it worked was because when both rates are very low, the noise outweighs the signal. So there’s no data for economists to really test the hypothesis on a period that matters because it’s similar to the current period of generally rising prices. But if economists just spoke to landlords, they would understand. That’s what I did, and the reason that in 2023 I switched my model from a top-down to a bottom-up (which is the dotted line in the first chart above…and that was not revised significantly). If costs are growing for landlords, they aren’t going to be cutting rents for their tenants even if they want to cut them for new tenants to fill a unit.
It should not be a surprise that the ‘faster’ NTRR has large error bars and large revisions. Essentially, the idea behind those indices is that they take the same rent data the BLS generates and squeeze out several different indices, some of which are “faster.” But basic information theory says you can’t get 3 bits of data from a pile that holds 1 bit, for free. What happens is those new indices are faster…but they have huge error bars that are huger the shorter the forecast length. Duh. Which means you can’t reject any null hypothesis about the near-term path. In the original paper they mention this and they show the data on the variance but they didn’t really explain it well. The short way to describe the problem is that you can’t get three pounds of crap out of a one pound bag. Period.
Now…having said all that I do entertain the possibility that rents could slow meaningfully further than here, even more than the mild softening that my model has. But my reasons for that are different:
- Rents in NYC will likely decline sharply if Mamdani wins, partly because jobs will absolutely flee the city but mainly because of his not-very-veiled-threat to seize property if they don’t. The smart landlords will dump their property at any price and get out, but some will try to ride out his term as Mayor. That’s unlikely to work but they’ll try. And NYC is a big part of the rent indices (by the way, one hedge for this is to sell the Shiller NYC property index, which futures trade (thinly, but they trade) on the CME. Combined with naturally slowing rent growth from some of the really hot but now getting overbuilt areas – like Miami – and you could get the overall indices to look better than the median would.
- (Offsetting this but probably nearer-term, LA rents will be buoyant for a while and maybe more sharply once the wildfires are further in the rear-view mirror so the claims of “profiteering” can be ignored. They bounced right after the fires destroyed a huge number of units but predictably people screamed at landlords so that stopped. But supply and demand, you know. There are fewer rental units in Los Angeles, and rents are going to go up faster as a result).
- If mass deportations really do turn into mass deportations, then what we are already seeing with Lodging Away from Home could become broader pressure on rents. The hotels were where the newest and biggest wave of illegal migrants were housed in the big cities. Elsewhere, they live in apartments and sometimes own homes when they have been here for a while. I can’t imagine the government will be able to deport more than say 1mm over the next year or two. That would be 2000-4000 per work day, and while the illegal immigrants generally walked in they generally have to be flown out. However, 1mm is still a big number and if enough other illegals ‘self-deported’ so that you’re talking about a million households then you’d have to consider a good chance of significant housing disinflation as the stock of rental units – currently just barely out of shortage – becomes a glut from the demand side.
But note that neither 1 nor 2 is currently something that you’d be able to detect with NTRR or Zillow or other rental indices. Maybe at the margin we could see deportations affecting rents in some of the ‘sanctuary cities’ where a lot of the deportations are concentrated, but I doubt it. Too soon.
In any event, my forecast for rents is not super-aggressive and I recognize there are mostly downside risks associated with those enumerated reasons. But right now? In the data? There is nothing that looks like it spells housing deflation.
USELESS Coin vs Very Useful Coin
It is rare, in the investment world, for an investment to honestly and fully disclaim its basic nature in a way that finishes the story and requires no further analysis from us before making an investment decision. I have found such an investment. It is a cryptocurrency/meme coin called, appropriately, USELESS. https://coinmarketcap.com/currencies/theuselesscoin/ If you were to buy all of the USELESS in existence, it would cost you (as of this writing) about $272 million dollars. This seems to me to be a lot of money to pay for something useless, but what do I know?
Now, it should be noted that there are lots of useless coins. DOGE coin. Fartcoin. I could go on and on. But the difference here is that as far as I can tell, USELESS is being completely honest. It is not usable as a payment rail. It is not redeemable for anything, at any time, and therefore it is guaranteed to one day be worth zero. It doesn’t even come printed on a nice certificate so that the scripophiles can frame it and put it on the wall.
To be fair, as I said it isn’t the only such memecoin that is useless. It is merely the only one that turns that uselessness into a dare. It is a game, of seeing who eventually gets the ‘pride of place’ as top-ticking it, paying the highest price for something that is useless and that never pretended otherwise. (People who bought Enron stock were buying something that turned out to be worth zero, but they didn’t know it at the time. USELESS buyers are fully aware and cannot possibly claim otherwise.)
And actually, ironically, that unlocks the reason this coin exists. It reminds me of a fantasy baseball auction. For those of you who don’t play fantasy sports, there are generally two varieties: the ‘draft’ kind, where people take turns drafting players, and the ‘auction’ kind, where someone offers a player and a price they will pay for that player, from a limited budget allotment. The other participants in the draft all take turns bidding until someone wins the player, and then the process is repeated until every fantasy team is full. Done correctly, a bidder doesn’t merely bid for the players he or she wants but also bids up the price of a player he or she does not want, in order to force someone else to pay more than that player is worth. This part of the auction is a game, trying hard to make someone else pay top dollar – which requires you to figure out what everyone else’s top price is – while not getting stuck with the now-overvalued hot potato.
I think that’s what USELESS is. It’s a game of trying to push the price higher and higher, until someone is stuck with the honor of having paid the highest price for an utterly worthless unit. It’s a game; it’s only a game; and it is just as much of an “investment” as is the forty-two dollars you paid to select Juan Soto for your fantasy team.
Now, as you all know by now I have been at least partially converted and no longer think that all crypto is useless. The absolute opposite of USELESS is the enormous utility of our inflation-linked stablecoin, USDi. And yes, I’ve written about it before. And yes, I will write about it again. Because it’s as useful as it gets. There is no such thing as inflation-linked cash in traditional finance space. I am not aware of any bank that offers an inflation-linked savings account. And this is not a little thing. This is a big, big thing.
The chart below shows a hypothetical efficient frontier made up of a lot of different asset classes; this frontier might look a little different from what you’re familiar with because the x-axis and y-axis are in real terms whereas most of us learned finance in nominal terms where you had a Treasury bill as the risk-free asset. But we don’t care about nominal returns (if we did, we’d own stocks in the most hyper-inflating country we can find) – we care about real returns. In the nominal world, Tbills or money market funds exist with sub-zero real returns most of the time. More importantly, they have significant risk in after-inflation terms. As a result, in real space we are confined to the blue curve as our efficient frontier (the curve shows the lowest-risk portfolio that achieves a given expected real return. Remember these numbers are all hypothetical but the point I am making doesn’t depend on the numbers).
But USDi is, as I said, super useful. It is the origin security, the zero-real-risk, zero-real-return point. And that means that it improves every portfolio in real terms, with the possible exception of very-high-risk portfolios.
Now, most of these securities don’t yet exist in the defi world. There really aren’t any tokenized commodities yet, except in the narrow edge case of gold and one or two other single spot commodities – and no tokenized commodity indices yet, and commodity indices have additional sources of return beyond the spot commodity return. No tokenized TIPS, and few tokenized equities. Someday, the defi world will have these things. But what it does have right now, which is really useful and a good enough reason to visit the crypto world, is the low-risk security: USDi. How useful is that?
[N.b.: USDi was originally launched in a manner only available to accredited investors. However, because of growing regulatory clarity about its status as a stablecoin or currency rather than as a security, we have re-launched USDi so that the mint/burn functions are available to all. The coin’s address on mainnet is 0xAf1157149ff040DAd186a0142a796d901bEF1cf1. We will be adding functionality to allow minting or burning via user tools on our website, but in the meantime users can make a public call to the blockchain to mint or burn versus USDC. Reach out via the https://USDiCoin.com website if you want more information.]
Inflation Guy’s CPI Summary (June 2025)
If you squint, can you see an effect of the deportations of illegal aliens in today’s CPI report?
I don’t want to encourage anyone to obsess over every jot and tittle of the report. That’s almost always a fraught exercise. But there were at least a couple of things in the data this month which could indicate both inflationary and disinflationary effects of the deportation campaign. A serious part of my brain is saying ‘come on, there just haven’t been many deportations in the context of the population of illegals, how can we see an effect?’ And that instinct is probably right.
Before we get into today’s release let’s remember that there is one important context to keep in mind and that is that unless there are major surprises to the downside, core and headline inflation are going to be accelerating for most of the rest of the year on a year-over-year basis. I discussed this in a short podcast last week, Ep. 145: Beware the Coming Inflation Bounce. So we need to keep in mind as we think about markets and policy that the optics are going to look worse for a while here.
That is, unless we get numbers like we did in the May CPI, which was a major miss due mostly to very soft figures on rent inflation. Last month, Primary rents were +0.213% m/m and Owner’s Equivalent Rent (OER) was +0.275%. Rents are decelerating but not that fast, but if they did then a 2% target on inflation becomes at least possible. It’s not yet possible.
The consensus for today’s number was +0.26% on headline and +0.25% on core. Right in the middle of 0.2% or 0.3% rounded prints. What happened is that we got one that ticked up and one that ticked down. Actual CPI was +0.287% on headline, and +0.228% on core inflation. That caused the year/year headline number to print +2.7%, up from 2.4% last month (and higher than 2.6% expected), and y/y core to be 2.9% (vs 2.8% last month, and as-expected). The usual suspects trumpeted ‘another miss softer on core CPI! Rate cut on tap for September!’ But what is the real story?
The real story is not nearly that encouraging. As we will see, there are quite a few signs that the core miss was an aberration. Not a bad one, but deceiving.
Here is my guess at Median CPI.
The median category is likely the West Urban OER subcategory, which means that the actual median will depend on where that seasonal adjustment comes down. But two of the four OER subcategories are higher than that, so I doubt my guess is wildly off (when it isn’t one of those subcomponents, I nail the median but because they split up OER, sub-seasonals matter). So median should be around 0.30%, or 3.6% annualized. Median CPI has rounded to 3.5% y/y since February and it’ll be there again. That looks like progress has stopped. The chart below doesn’t include today’s figure but to illustrate that we’re seeing a flattening out of progress.
Now, this is what we would expect if tariffs were starting to affect prices generally, is that median would accelerate a little bit but core not necessarily. However, tariffs aren’t going to affect prices generally. They’re going to affect core goods primarily. So what is going on here?
One clue is that there was only one category this month that had an annualized monthly change of less than -10%. Normally there are a handful of categories on the tail (for example, there were 8 categories – in the way we slice them up for calculating Median CPI – where the annualized monthly rise was greater than +10%). This one category was Lodging Away from Home. Month/month was -2.9%, and year-over-year changes in hotel prices are at -2.5%: near the lowest levels since the sharp declines during COVID.
That may be where we squint and see a positive (lower inflation) effect of the deportations. We should expect that mass deportations should cause a relief on upward pressure on certain goods and services that happened when 8mm+ new residents arrived over 4 years. Folks love to focus on the wage effects as being inflationary (more on that in a moment) but they forget that you’re removing a bunch of consumers and while not 100% of illegal aliens work, 100% of them consume. And one of the things they consume is shelter. To be sure, we haven’t had anything remotely like ‘mass’ deportations yet. But releasing some of the hotels that were being paid for by cities to house migrants is one place that it’s totally understandable we should see a positive effect. The effect on home prices will come later.
While some pressure may continue to come off of shelter inflation, there’s this disturbing trend in Tenants and Household Insurance – and that’s before State Farm announced a 27.2% increase for Illinois. Yuck!
To be balanced on the deportation issue, let me point out something that comes up in the ‘four pieces charts’. Piece 1 is Food and Energy; Piece 2 is Core Goods; Piece 3 is Core Services less Rent of Shelter aka Supercore; Piece 4 is Rent of Shelter.
First, notice that core goods continues to trend positive – finally. Y/Y core goods went to +0.7% from +0.3%, despite continued softness in autos. The auto softness will not last forever; some of it is likely due to front-running tariffs. But more interestingly, note the small but measurable hook higher in Supercore. That’s where wages show up most strongly, so if deportations are causing better wages, we would expect that. So is this a deportations effect at the margin? I doubt it. As I said before, deportations are no where near “mass” yet so I’d be surprised to see an effect there. But watch this space.
So how excited are we about the core surprise lower?
The answer is not at all. Core goods is trending positive and while I don’t expect a massive tariff effect I am pretty sure it won’t be negative. Core services is going to have some upward pressure if deportations turn out to make a difference at all. Eventually, the effect on shelter and on other goods and services demand will be disinflationary but timing-wise that’s going to be after the tariff effect. And in the meantime, monetary aggregates are accelerating again in the US and Europe.
Is the story, then, that core inflation is going to continue to surprise to the downside? Well, when you look at the broader picture, at not only which prices are rising and falling but how broadly it’s happening, the news is not all unicorns and rainbows. Here is a chart of the weight of the CPI basket that is inflating at faster than 4% y/y.
That has improved, but I can’t help but notice that it is not even vaguely in the vicinity of pre-COVID. How can we get overall inflation to 2% if nearly half of the basket is inflating faster than 4%? Well, you’d need core goods to be really soft, and that part is done.
We can see that also in the Enduring Investments Inflation Diffusion Index (EIIDI), which has been sub-zero for a while but this month, jumped to positive.
These tell the same story – this month we could get all excited about the core miss…except that outside of Lodging Away from Home, the story isn’t so happy.
From a policy standpoint, there is just no reason to drop rates below neutral and we’re pretty close to neutral right now. Here’s something to think about (but the Fed won’t think about this because they don’t pay attention to money). Abstract from tariffs for a moment – tariffs are never a reason to maintain higher rates, because they are a one-off. But let’s suppose you believed that mass deportations would push up inflation and wages. The argument for a central banker would be that fewer workers in the economy implies a smaller economy, and a smaller economy needs less money. Therefore, while tight Fed policy can’t affect tariffs, they could affect prices that are rising because of deportations.
Again, let me clarify that I don’t think deportations are doing anything yet, and I think they’re as likely to push prices down in shelter and some core goods as they are to push wages and prices higher in services. I’m just saying that if you think deportations are inflationary, there is a monetary policy response that makes sense and it isn’t easy money.
So unless the economy starts to soften more seriously, there just isn’t a good argument right now for rate cuts. And now that the y/y numbers are heading higher because of base effects at least, the optics are going to be worse for the Fed to consider an ease. There is always an ‘unless’, and here the ‘unless’ is ‘unless Powell resigns and is replaced with an uber-dove.’ I can’t imagine that Powell wants to be the first Fed chairman ever to resign in disgrace, and no one can force him out, but stranger things have happened. However, I can’t handicap politics. I’m only handicapping inflation.
And, by the way, if you think that inflation itself is a handicap, consider the USDi coin! Here is a chart of the value of the coin by day. The red dot is where we are.
One final announcement. If you’re an investor in cryptocurrencies (in particular, stable coins) and have a Telegram account, consider joining the read-only USDi_Coin room https://t.me/USDi_Coin where the USDi Coin price is updated every four hours or so…and where these charts are also posted shortly after CPI just as I used to do on Twitter.
When and How Much Tariff Effect?
As we look forward to the CPI report next week, the monthly-repeating theme is ‘when will the tariff effect show up?’ The answer, so far, is ‘not yet,’ but economists who had forecasted the end of life as we know it when the Trump tariffs went into effect have been befuddled.
I’ve already admitted in this column that I was educated in the tradition of ‘tariffs bad,’ but that over the years Trump’s insistence otherwise has made me carefully re-think of which ways tariffs are truly bad, and which ways they’re not so bad. Naturally, if tariffs were uniformly bad – which seems to be the orthodoxy – then it would be really hard to explain why almost every country levees tariffs. Maybe forty years ago we could blame the benightedness of those poor policymakers in other countries, who clearly just didn’t understand how bad tariffs are. But now? Heck, all someone in one of those countries needs to do is ask ChatGPT ‘are tariffs bad,’ and they’ll learn!
… Conclusion: Tariffs can be useful tools in specific, limited circumstances — like protecting vital industries or responding to unfair trade practices. But long-term, high or broad tariffs often do more harm than good, especially in highly interconnected global economies. (ChatGPT, July 9, 2025 query ‘Are tariffs bad’)
But it seems every country has these specific limited circumstances! It’s evidently only bad when the US does tariffs. And that is what made me ask whether maybe there is some nuance. My 2019 article “Tariffs Don’t Hurt Domestic Growth” was really good, I thought.
Even as there has been some small movement in the economintelligencia, though, about whether tariffs are all bad there has been very little movement in the notion that they are clearly inflationary. No doubt, implementing a tariff will raise prices at least a little, but how much is the important question. And regardless of that answer, tariffs are a one-time adjustment to the price level even if that effect is smoothed over a period of time. (This is why it’s weird to hear Powell say that the Fed can’t ease because they’re waiting to see the effect of the tariffs on inflation. That’s economic nonsense. The Fed can’t possibly believe that keeping rates high is the proper response to a one-time shock.)
On this question, I thought I’d share something I wrote in our Quarterly Inflation Outlook from Q1 (in mid-February), in which I roughly estimated the effects of a 20% blanket tariff. I know the answer isn’t “right,” because that’s the wrong question – there isn’t a 20% blanket tariff. But I undertook the estimate to get an idea of the relative scale of effects. (I included in the piece some parts from that 2019 article mentioned above, because I’m not above stealing from myself!) I will add some concluding thoughts after this ‘reprint’ from our QIO – which, by the way, you can subscribe to here.
Tariffs as a Tool to Promote Domestic Growth and Revenue
In the President’s view, the fact that the U.S. has a very low tariff structure compared to the tariffs (and arguably VAT taxes) that other countries place on U.S. goods is prima facie evidence that the U.S. is being taken advantage of and treated unfairly on world markets. The U.S. has, for the better part of a century, been the main global champion of free trade and this tendency accelerated markedly in the early 1990s (as the familiar chart below, sourced from Deutsche Bank, illustrates well).
The effect of free trade, per Ricardo, is to enlarge the global economic pie. However, in choosing free trade to enlarge the pie, each participating country voluntarily surrenders its ability to claim a larger slice of the pie, or a slice with particular toppings (in this analogy, choosing a particular slice means selecting the particular industries that you want your country to specialize in). Clearly, this is good in the long run – the size of your slice, and what you produce, is determined by your relative advantage in producing it and so the entire system produces the maximum possible output and the system collectively is better off. To the extent that a person is a citizen of the world, rather than a citizen of a particular country – and the Ricardian assumption is that increasing the pie is the collective goal – then free trade with every country producing only what they have a comparative advantage in is the optimal solution.
However, that does not mean that this is an outcome that each participant will like. Indeed, even in the comparative free trade of the late 1990s and 2000s, companies carefully protected their champion companies and industries. Even though the U.S. went through a period of being incredibly bad at automobile manufacturing, there are still several very large U.S. automakers. On the other hand, the U.S. no longer produces any apparel to speak of. In fact, the only way that free trade works for all in a non-theoretical world is if (a) all of the participants are roughly equal in total capability, and permanently at peace so that there is no risk that war could create a shortage in a strategic resource, or (b) the dominant participant is willing to concede its dominant position in order to enrich the whole system, rather than using that dominant position to secure its preferred slices for itself and/or to establish the conditions that ensure permanent peace by being the dominant military power and enforcing peace around the world. We would argue that (b) is what happened, as the U.S. was willing to let its own manufacturing be ‘hollowed out’ in order to make the world a happier place on average.
The President (and many of those who voted for him) feel that (b) is inherently unfair, or has reached extremes that are unfair to U.S. citizens. Essentially, the President is rejecting the theoretical Ricardian optimum and pursuing instead a larger slice for his constituents. This is where reciprocal tariffs (where the U.S. matches the tariff placed on its exports by a trading partner, with a tariff placed on the imports of that product from that trading partner) or blanket tariffs (where the U.S. imposes a tariff on all imports of a product irrespective of source – e.g. aluminum – or on all imports from a given trading partner) come in.
Blanket tariffs are good for domestic growth,[1] but definitely increase prices for consumers. How good they are for growth, and how much prices rise, depends on how easily domestic un-tariffed supply can substitute for the imported supply and also on whether your country is a net importer or exporter, and how large the export-import sector is in terms of GDP. Because this is an inflation outlook, let’s make a very rough estimate of the impact on the overall domestic price level of a blanket 20% tariff (such as the one Treasury Secretary Bessent has proposed). We suppose the average elasticity of import demand in the U.S. to be 3.33[2] and the elasticity of export supply to be 1.0[3]. In that case, the incidence of a tariff falls about 23% on consumers: [1.0 / (3.33+1.0) ]. So, for a 20% tariff, prices for the imported goods would be expected to rise about 4.6% (20% tariff x 23% incidence). However, imports only account for about 15% of US GDP, which means the effect on the overall price level would be 15% x 4.6% = 0.69%.
So, for a 20% blanket tariff on imports, Americans should expect to see a one-time increase in the overall price level of something on the order of 0.7%, smeared over the period of implementation. This is not insignificant, but it is also not calamitous. It does affect our estimates for 2025 and 2026 inflation, shown in the “Forecasts” section (somewhat less than 0.7%, because we do not expect a blanket tariff but rather reciprocal and targeted tariffs). Also note that the retaliatory tariffs on US exports have no direct effect on domestic prices, so that whether or not trading partners retaliate is irrelevant to an analysis of first round effects, anyway.
Thus my wild guess back in February was that a 20% blanket tariff would result in a bit less than 0.7%, smeared out over 2025 and 2026. That doesn’t answer the ‘timing’ question, but the delays in implementation (so as to not affect Christmas 2025 prices of the GI Joe with the Kung-Fu Grip) and the importer/retailer initial reaction to try and absorb as much as possible for optics – presumably, easing price increases into the system later – mean that it shouldn’t be shocking that we haven’t seen a big effect yet. My point in the above calculation, though, is that we really shouldn’t expect to see a big effect, regardless.
For what it’s worth, the Budget Lab at Yale estimates that currently “the 2025 tariffs to date are the equivalent of a 15.2 percentage point increase in the US average effective tariff rate,” so if we take my 0.7% guess for 20% then we would be looking closer to 0.5% in total. And in fact, lower even than that since the 15.2% average will have less impact than a 15.2% blanket tariff, assuming that the tariffs will be highest where domestic substitution is easier.[4]
Wrapping this up, let me make one final observation. Current year/year headline CPI inflation is 2.35%. The inflation swaps market, specifically the market for ‘resets’ where you can trade essentially the forward price level, currently suggests that traders expect y/y inflation to rise to 3.29% over the next six months: almost 1 full percentage point from here. But that actually flatters what the market is pricing, because the shape of the energy curves suggests that rise is being dragged about 20bps lower by the implied moderation in energy prices (give me a break, inflation traders: I’m doing this in my head).
So, the market is pricing core inflation peaking about 6 months from now, about 1.2% higher than it currently is. Not all of that is the effect of tariffs; some is due to base effects as the very low May, June, and July 2024 numbers roll off of the y/y figure. But if we get that result, you can be sure that economists will put most of the blame on Mr. Trump, while Mr. Trump will put most of the blame on Mr. Powell. Either way, I think the interest rate cuts that the President would prefer are unlikely unless growth takes a significant stumble.
[1] …but bad for global growth! There is no question that unilaterally applying tariffs to imports is bad for all suppliers/countries providing those imports. If Ricardo is right, the overall pie shrinks but the domestic slice gets larger…at least for the dominant players who already have a large slice. If everyone raises tariffs in a trade war outcome, the less-productive countries suffer the most loss of growth and the most-productive countries likely still benefit. But prices rise for all.
[2] Kee, Nicita, and Olarreaga, “Estimating Import Demand and Export Supply Elasticities”, 2004, Figure 5, available at http://repec.org/esNASM04/up.16133.1075482028.pdf Your answers may vary!
[3] Estimates are wildly all over the map, depending on the exporting country and the product. In general the smaller the country, the more price-inelastic it is. We chose unit elasticity here (a 1% increase in price cause a 1% increase in the quantity supplied) just to be able to get a rough guess.
[4] To be fair, the Budget Lab at Yale also estimates the effect on PCE inflation of a whopping 1.74%. They must be really surprised at the impact so far.
