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Indianapolis Star

Tariffs will cost families $2,500 this year — but wages won't rise to help

The average American family will pay about $2,500 more this year because of tariffs. But unlike inflation, your wages won't rise to compensate. That's because tariffs work differently than inflation. Tariffs cause an increase in the price of goods, both imported and their domestic competitors. But that price increase is not technically inflation — it's worse. Here is what is actually happening. Inflation is a decline in the value of currency over time. It happens because there is too much currency in circulation. That extra money can enter the economy through a growing deficit, as happened after the 2020 CARES Act, the 2021 American Rescue Plan and — the most inflationary of these — President Trump's Big Beautiful Bill. Still, tax and spending policy alone cannot cause inflation. The Federal Reserve must also allow too much money growth. Inflation affects all goods and services, including wages. So, during this unpleasant bout of inflation, wages actually grew more than prices — at least for the average private sector worker. Tariffs work very differently. Tariffs are taxes on imports and range from 10% to 55%, depending on the country of origin, the product in question and the president's hormone level. Following the 2018 tariffs, we learned from multiple studies that American consumers paid almost all the tariffs. This was to be expected, because we're a rich country buying goods from poorer nations. We are likely to be less price sensitive than manufacturing firms in developing countries. Hence, we pay more of — or nearly all of — the tariffs. The good news is that in February, March and April, American imports spiked. In those three months alone, we bought roughly five extra months' worth of goods. Those purchases were clearly intended to beat the tariff deadlines and avoid the extra tax. That surge of imports meant that many of the goods now on store shelves and being assembled into cars, computers and washing machines were bought before the tariffs. That pre-tariff stockpile has meant that price increases have been relatively low so far. The bad news is that only $335 of that $2,500 family tariff bill has hit so far. The rest is coming as importing firms pass along their costs. The consumer price index — the main measure of inflation — rose 0.3% in the latest reading. That's modest, but it came as the Federal Reserve was successfully reducing inflation. Prices have stopped falling and are rising again. These higher prices are solely due to Trump tariffs. They are poised to worsen substantially as the stockpile of pre-tariff goods are sold by retailers or put onto cars, RVs and other American-made products. The cost of goods sold later this summer, and until tariffs are eliminated, will continue to rise. This increase in prices and the consumer price index will look, feel and taste just like inflation. Journalists and even economists will call it inflation, but it's not inflation. If it was inflation, we'd eventually see wages rising as well. But higher tariff costs don't lead to higher wages; in fact, the opposite may occur. The tariffs took the U.S. from 2.4% growth in the fourth quarter of 2024 to -0.5% in the first quarter this year. The economy continues contracting, which will reduce wage growth and maybe even reverse it. So, as prices go up, wages will decline for the average worker. We import goods to make American workers more productive. Skilled American workers focus on high-value manufacturing while importing cheaper components from abroad. When tariffs force companies to pay more for imports or make low-value parts themselves, productivity falls. That means lower wages and profits — or more job automation. In the two months of data since Trump's Liberation Day tariffs were announced, the U.S. has lost 14,000 factory jobs. The slowdown in the economy this year follows a pattern that is nearly a precise example of what economic explanations of tariffs have predicted for a half century. The price increases due to tariffs are not technically inflation. Economists have a name for rising prices during a weak economy: stagflation. It's what made the 1970s so miserable.