Many media sources report that Trump’s tariff policy will cause inflation.
Will it?
On July 15, the government announced that the CPI for June 2025 rose by 0.3% for the month. The next day, the PPI for June was reported to have been unchanged on the month.
The press reported the CPI number with significantly more gusto than the PPI number. For example, the Washington Post ran the somewhat convoluted headline:
“Democrats use tariffs to turn inflation on Trump”
Reuters reported much more clearly: “Tariffs fuel inflation concerns.”
These headlines repeat a familiar refrain from those opposed to tariffs. Tariffs, they say, are inflationary.
There are lots of strong economic reasons to oppose tariffs as a policy. But the argument that tariffs cause inflation is, at best, a very weak argument.
What is Inflation?
Inflation as the term is commonly used and as now used by economists, refers to a persistent increase in the “general price level.”
In the words of the Cleveland Fed:
Inflation is ongoing increases in the general price level for goods and services in an economy over time.[1]
There is No Such Thing as “The General Price Level”
On its surface, the “general price level” sounds like a real thing. But in an economy with millions of goods and services, and tens or hundreds of millions of consumers, there is NO single meaningful “general price level.”
As an individual, you buy certain goods and services at certain times. But you never buy the vast majority of goods and services.
There are some goods and some services that most people buy, but probably none that everyone buys. And there is certainly no single basket (i.e. set of goods and services with each one having a weighting) that everyone buys.
Nevertheless, the government defines a single “Consumer Price Index” which purports to measure the general price level.
It is virtually certain that no individual actually consumes the items in the CPI in the ratios that the items are weighted in the CPI.
The BLS collects about 94,000 prices each month![2]
How many items do you buy in a month? I’ll bet a lot fewer than 94,000. Hence, the vast majority of those prices are irrelevant to you.
And they’re irrelevant to most people too.
In some sense, the CPI as a representation of “the general price level” is like the statistical observation that “The average American has one testicle and one breast.” Both the calculation of the CPI and the humorous observation are true in the statistical senses by which they are defined.
But both are very misleading.
Oskar Morgenstern
Most people have never heard of Oskar Morgenstern, or if they have heard of him, they recognize his name as the second name on the book that launched the field of Game Theory.[3]
Morgenstern’s other major contribution has been largely ignored. That contribution is his warnings, expounded at book length, about the inherent limitations of economic statistics.
Morgenstern says, for example:
It ought to be clear a priori that most economic statistics should not be stated in the manner in which they are so often reported, pretending to an accuracy that may be completely out of reach.[4]
He goes on to say that:
National income and consumers’ spending power probably cannot be known now in part without an error of +/- 10 to 15 percent.
He would have scoffed at the hubris of purporting to measure inflation down to the 1/10th of one percent, as is standard practice today.
Oskar Morgenstern was trained at the University of Vienna in the interwar period. His most famous teacher was Friedrich von Wieser. He was also influenced by Friedrich Hayek and Hans Meyer, and others.[5]
Morgenstern and Paul Volcker
Former Fed Chairman Paul Volcker credits Morgenstern, indirectly, with introducing him to correct monetary theory. This monetary theory allowed Volcker to tame inflation after decades of Fed chairmen poured gasoline on the inflationary fire.
In his autobiography published the year before his death, Volcker explains that a course in money and banking when he was an undergraduate at Princeton in the 1940s came to change the course of modern history.
[The course was] taught by distinguished refugee scholars of the classic Austrian liberal school of economics, Oskar Morgenstern and Friedrich Lutz. They emphasized the works of… Ludwig von Mises and Friedrich Hayek…. While it hardly seems possible, to the best of my memory John Maynard Keynes and his theories in the English tradition advocating active government policies to manage the economy received no attention.[6]
Money Supply, NOT Interest Rates
Volcker understood that inflation is the result of too much money creation. Therefore, in his fight against inflation, he focused on the money supply. Volcker rejected the prevailing claim that “a little inflation is good for the economy.”
He states clearly that his policy
Would control the …the money supply) rather than … interest rates. The widely quoted adage that inflation is a matter of “too much money chasing too few goods” promised a clear, if overly simplified, rationale.
It’s the Money Supply, Not Tariffs
Paul Volcker may have been the only Fed chairman to really understand that the Fed must maintain price stability. He also seems to be the only chairman to understand that maintaining price stability is primarily a function of preventing excessive money supply growth.
The current Fed chairman, Jerome Powell, is on record as worrying that tariffs will cause inflation. He told the House:
We do expect … tariff inflation to show up more.[7]
Powell doesn’t believe money supply is important. In 2021, Powell made the astounding claim to the Senate. He said:
M2 … does not really have important implications. It is something we have to unlearn I guess.[8]
The Fed was then in the process of creating the largest percentage increase in the money supply in US history, and within months prices started to explode across the board. Powell was wrong then.
Powell is wrong now.
Tariffs
Tariffs are not intended to, and do not, affect the general price level, because tariffs do not affect the total supply of money, and have a very limited effect on the supply of goods.
Tariffs do hurt the economy, because like all taxes they divert some amount of money from a productive use to a less productive use. (We know the use is less productive because no one freely chooses to spend on whatever it is the government spends on.)
But tariffs do not affect the total amount of money that consumers have to spend on goods. If the prices of goods that are subject to tariffs rise (as is likely but not certain – it depends on something called the price elasticity of demand), consumers will have less money to spend on other goods. That decrease in demand for those other goods will cause those other prices to fall (though the amounts may be so small that they are undetectable).
Thus, tariffs affect relative prices, and not the “general price level.”
Tariffs and Sanctions
US Presidents of both parties have in recent years freely imposed so-called “trade sanctions” for reasons having nothing to do with economics or revenue. To the extent that such sanctions work, they often have similar effects to those that would arise from an infinite tariff rate.
That is, the intent of sanctions is to prevent trade with a particular country or in a particular good.
Sanctions are different in important ways from tariffs, but to the extent they are successful, they restrict the supply of the sanctioned goods and therefore drive up the prices of those goods outside the sanctioned countries. Why, then, do we rarely (I don’t remember ever) hear complaints about sanctions as inflationary?
One reason, I believe, is that sanctions tend to be widely applauded by both major parties, and, as with tariffs, the supposed economic argument that tariffs or sanctions cause inflation is clearly wrong.
This post is not a defense of tariffs. I am not a fan of tariffs because tariffs are a tax and taxes depress economic activity. Tariffs make most people (i.e. everyone who is not a direct beneficiary) poorer.
I look forward to your comments.
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[1] https://www.clevelandfed.org/center-for-inflation-research/inflation-101/what-is-inflation-start
[2] https://www.bls.gov/opub/hom/cpi/?utm
[3] Theory of Games and Economic Behavior, Princeton University Press, 1944. The first name on the book is that of John Von Nuemann. Von Nuemann is regarded by many, including his contemporaries Enrico Fermi, Claude Shannon and Jacob Brownowski as the smartest man they’d ever met.
[4] On the Accuracy of Economic Observations, Princeton University Press, 1950.
[5] Remembering Oskar Morgenstern, Richard Ebeling, Quarterly Journal of Austrian Economics, Spring 2020.
[6] Paul Volcker, Keeping At It, Hachette, 2018
[7] https://www.npr.org/2025/06/24/nx-s1-5442665/federal-reserve-powell-economy-interest-rates-tariffs
[8] https://www.reuters.com/article/business/powells-econ-101-jobs-not-inflation-and-forget-about-the-money-supply-idUSKBN2AN2EJ/#:~:text=”When%20you%20and%20I%20studied,have%20to%20unlearn%20I%20guess.”
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