Can you imagine that despite a surge of new tariffs and trade restrictions by President Donald Trump in the U.S. inflation has dipped to its lowest point in four years. In April 2025, the Consumer Price Index (CPI) rose by just 0.2%, with core inflation a measure excluding food and energy also up by 0.2% month over month, marking a 2.8% increase from the previous year. This unexpected cooling of inflation has left many economists confused, especially for the given conventional wisdom around how do tariffs impact the economy.
Understanding Tariffs, Core Inflation and Their Economic Impact
Let’s deep dive into understanding what Tariffs, its effects, core inflation and their relationship with economy is while addressing the key question: how tariffs impact the economy?
Tariffs are essentially taxes that governments impose on imported goods. The idea is simple by making foreign products more expensive, domestic industries are better protected. Tariffs can also be used as political tools in trade disputes or as a means of boosting government revenue. The assumption is that the added import cost will get down to consumers ultimately increasing the retail prices and contributing to what’s often referred to as tariffs inflation. This is one of the clearest tariff effects: imported goods cost more and in turn, everyday items in the store get pricier.
What Is Core Inflation?
Core inflation is an advanced version of inflation that excludes two main volatile components such as food and energy. These categories can fluctuate dramatically due to seasonal trends, weather events or geopolitical tensions. By filtering them out completely, economists can get a clearer picture of the underlying, sustained price movements in the economy. Core inflation is basically what the Federal Reserve and policymakers often focus on when determining monetary policy, such as interest rate decisions.
As mentioned in an current article by Forbes, the data showed that core inflation rose by just 0.2%, contributing to the lowest annual inflation rate in four years. This goes against the expectations, as many believed recent waves of tariffs would fuel a significant price surge across consumer goods.
How Do Tariffs Affect Inflation?
Under typical circumstances, tariff effects lead to increased prices on imported goods costs that are often passed along to consumers. For example, if a 10% tariff is placed on imported electronics, those products become more expensive at the store, nudging inflation higher. That’s the logic behind tariffs inflation.
However, as highlighted in an article by Forbes highlighted, this expected relationship hasn’t fully emerged in recent months. Despite numerous new tariffs in early 2025, both CPI and core inflation remained relatively modest.
This suggests that factors like retailer price absorption, supply chain reconfiguration and changes in consumer behavior may have weakened the immediate tariffs inflation impact. The data challenges the traditional assumption of how do tariffs impact the economy, confirming that in today’s globalized, adaptive markets, the tariff effects may be more nuanced than previously thought.
The Expected VS The Actual: Tariff Effects and Inflation
Traditionally, when tariffs are implemented, the cost of imported goods rises. This increase is usually passed on to consumers, which pushes overall prices higher. In simple terms, tariff effects often result in tariffs inflation, an uprise in consumer prices caused by import taxes.
For example, a Federal Reserve study (May 2025) estimated that the latest round of 2025 tariffs contributed to a 0.3% increase in core goods prices, leading to a 0.1% bump in core inflation. But here’s where it gets interesting, the data isn’t aligning with the usual narrative. Despite widespread tariffs introduced earlier this year, the expected surge in prices hasn’t fully occurred. According to Forbes, core inflation in April 2025 rose just 0.2%, and overall CPI also increased by a modest 0.2%. In fact, certain items got cheaper, not pricier:
- Egg prices dropped by 12.7% in April.
Source: USA Today - Gasoline prices declined 3.8%, and airfare fell 0.8%, easing pressure on overall inflation.
- Items like butter, olive oil, and poultry also saw price drops due to strategic sourcing and domestic alternatives.
Source: Reuters
Reasons why Tariffs Inflation didn’t play out as expected?
If tariffs usually push prices up, why didn’t we see the kind of tariffs inflation everyone expected? The answer lies in how quickly different parts of the economy adapted. Let’s break down the key tariff effects that reshaped the outcome and what they tell us.
- Retailers adapted fast. Big players like Costco shifted to domestic suppliers or absorbed costs through private labels to keep prices stable.
Source: USA Today - Supply chains adjusted, with companies re-routing logistics and seeking new partners outside of tariff-affected zones.
- Consumers changed behavior, delaying or avoiding certain purchases in response to earlier inflation spikes, easing demand pressures.
According to Forbes, economists expected higher inflation due to the tariff effects, but April 2025 marked the lowest annual core inflation rate in four years at just 2.8%. This growing disconnect between tariff expectations and actual inflation raises new questions about how do tariffs impact the economy in modern times. The global market’s agility, retailer strength and smarter consumer decisions have all helped mute traditional tariffs inflation outcomes.
Lessons Learnt: Tariff Effects Done Right?
We all can agree on that not all tariffs are created equal. In fact, when used along with strategy, tariff effects can act as a positive force in developing economies. Economist Ha-Joon Chang says South Korea’s smart use of tariffs in the 1960s and 70s was a game-changer, it protected local industries until they were ready to compete globally. This historical success story shows that the answer to how do tariffs impact the economy isn’t always negative, when well-planned, they can fuel industrial growth and long-term prosperity.
Compare that to the U.S. currently, where tariffs were introduced in a more reactive and politically charged environment. According to Forbes, widespread tariffs were imposed on Chinese goods, EVs and more. The expected tariffs inflation, a rise in consumer prices due to higher import costs didn’t fully emerge. This outcome supports that tariff effects depend not just on the policy itself, but on how businesses and consumers respond. In today’s global economy, poorly designed tariffs can add chaos rather than clarity, weakening their intended economic impact.
Conclusion
The latest economic data forces us to rethink how tariff effects play out. Traditionally, tariffs are seen as a direct route to higher prices aka tariffs inflation but the April 2025 numbers tell a different story. As reported by USA Today and Reuters, inflation stayed cool, with CPI up just 0.2% and core inflation at its lowest in four years at 2.8%.
So, what kept tariffs inflation in check? According to a Federal Reserve report, the impact was smaller than expected, a mere 0.3% rise in core goods and a 0.1% increase in overall core inflation. This limited effect was thanks to quick adjustments by major retailers like shifting to domestic sourcing, smarter consumer behavior and flexible supply chains. In short, the tariff effects were muted because the economy adapted fast.
All of this shows that in today’s interconnected world, the answer to how do tariffs impact the economy isn’t one-size-fits-all. It depends on timing, execution and the global market’s ability to shift. For policymakers, the lesson is clear: be strategic, not reactive or tariffs inflation may be the least of your worries.Discover how Glocal Accounting services can help make the right choice for your business.
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