Inflation Is Not Soaring, and Economic Growth Is Solid

Commentary

The Tariff Tantrum has proven that the consensus was wrong about soaring inflation and an economic slump. Why? The exaggerated perception of tariffs’ economic impact stemmed from the belief that American consumers would bear the full burden of tariffs. Why were they wrong?

The first reason was because most analyses made a simplistic calculation of tariffs as if supply chains were made of buyers and sellers alone. Supply chains are very complex, and most exporters must deal with overcapacity challenges and working capital problems. Thus, the impact of tariffs is likely to be absorbed by the numerous links in the supply chain, including transport, storage, distribution, manufacturing, retailers, and purchaser chains. Furthermore, most exporting companies face a significant problem of overcapacity and working capital; if they don’t sell their products quickly and effectively, their debt soars, and the losses at warehouses can lead to a chain of bankruptcies.

Ignoring that the world of exporter businesses, particularly in China, has a structural overcapacity problem and mounting financial challenges due to working capital build was one of the mistakes made by excessively pessimistic analysts. In fact, there is no sign of inflation soaring anywhere. The Export Price Index rose by only 0.1 percent in April and by 2.0 percent year on year, while the Import Price Index rose by a modest 0.1 percent in the month and by 0.1 percent year on year. In April, prices dropped by 0.5 percent in final demand PPI (producer price index). On a year-over-year basis, headline and core April PPI declined versus previous readings.

U.S. retail sales rose by 0.1 percent in April, up 5.2 percent from April 2024, and following a large 1.7 percent increase in March 2025. Inflation hit a four-year low in April, a month that should have reflected a massive increase due to tariffs, according to consensus estimates, while wage growth rose to a four-year high.

Inflation in April decreased to the slowest pace since 2021. Egg prices fell by 12 percent, and prices for bakery items, meat, and poultry also decreased. Americans are not suffering the apocalyptic inflation that interventionists predicted. The consumer price index (CPI) rose by 0.2 percent compared to 0.3 percent expected—an annualized rate of 2.3 percent—and the lowest in four years. Furthermore, core CPI rose only 2.8 percent, showing no sign of inflationary pressures.

The first quarter’s gross domestic product was positive. Despite a 0.3 percent decline, the private sector grew by 1.6 percent annually. Government spending, meanwhile, declined by 5.1 percent. On May 13, JP Morgan removed its call for a recession and the Atlanta Fed Nowcast shows a healthy 2.4 percent GDP growth for the second quarter, an estimate shared by Goldman Sachs and Capital Economics.

The key to understanding the lack of inflation is to look at monetary aggregates. Tariffs do not cause inflation. There are other reasons we can use to criticize tariffs, but not inflation causation. Market participants have realized that tariffs serve as a tool for negotiating better trade deals and facilitating the opening of markets, rather than being used solely as a protectionist measure.

What causes inflation is soaring government spending, leading to rising money supply and money velocity. Deficit spending is down 35 percent between February and April 2025 compared to the same period last year. While money supply is rising, albeit at a modest pace, velocity of money is gradually declining. The public sector is slowly shrinking and the private sector is strengthening; hence, there is no real inflation risk.

The only thing that can make aggregate prices rise, consolidate, and continue is the debasement of the purchasing power of the currency due to uncontrolled government spending. Thankfully, government spending is starting to moderate.

The U.S. economy is stronger than it appears, and the negotiating power of importers is larger than estimated due to two factors: the previously mentioned overcapacity challenge of most exporters and the global relevance of the U.S. market. Exporters cannot substitute their U.S. sales with other markets. Even the European Union is relatively weak as a market.

In the following months, we will likely see more trade deals, and most concerns from market participants will likely vanish or at least be significantly reduced. Ultimately, the Tariff Tantrum has proven that Keynesian analysis is wrong and that successful trade deals were the goal of the administration.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.