The Tenuous Link Between Tariffs and Inflation

Week of March 3, 2025

If there is one thing certain about markets, it’s this: being certain about anything often ends in tears. We wonder if that is the case with a current “certainty”: that Trump’s tariffs will necessarily cause inflation.

There wasn’t any inflation after Smoot-Hawley, that’s for sure. The most notorious tariff round in modern American history was announced on June 17, 1930. Over the next 1-, 2- and 3-years, the Producer Price Index (PPI) for all commodities witnessed annualized declines of 17.3%, 14.4% and 9.3%, respectively. Was it the October 1929 stock market crash that sent prices spiraling lower? Was it the freezing up of commerce from the tariffs that did it? Both? Something more?

The deflationary backdrop in the years after Smoot-Hawley was essentially the opposite of the aftermath of Nixon’s closing of the gold window on August 15, 1971. When Nixon played that card, he also levied a 10% import surcharge, but that part of the legend is often forgotten. Looking again at the 1-, 2- and 3-years after, the PPI for commodities posted 4.0%, 5.6% and 9.5% annualized gains, respectively.

There are other notable episodes of big tariff initiatives. Because people think of flapper hats and the newly invented automobile when asked about the 1920s, not too many observers choose to cite the Emergency Tariff Act of 1921 and the Fordney-McCumber Tariffs of September 1922 in their remembrances of the era. Those two tariff rounds both came after the so-called “forgotten depression” of 1920-1921.

The Emergency Tariff Act was announced May 27, 1921. Reviewing again the subsequent annualized all-commodities PPI for the next 1-, 2- and 3-years, we see a lot of nothing: +0.0%, +2.7% and -0.2% annualized inflation, respectively. For Fordney-McCumber, which captures much of the same timeframe, the figures are +0.6%, -1.2% and +1.3%. Both are positively benign when we consider the economy was escaping the forgotten depression in those years.

Now the stuff many of us witnessed in our own lifetimes.

George W. Bush announced steel tariffs on March 5, 2002, but the public has largely forgotten that part of the timeline because September 11th dominates the historical focus of this century’s initial years. Bush laid that down right as the Commodities Supercycle was taking off. If they want, the “tariffs cause inflation” people can point to this episode, which saw +8.8%, +5.0% and +5.8% annualized growth in the commodities PPI for the respective time windows. However, the reality that we think almost all of us can agree on is that China’s 2001 accession to the World Trade Organization was what really mattered for the calculus.

That brings us to the present-day situation. The solar panel-and-washing machine levies of January 22, 2018, were the first explicit tariff announcements of the first Trump term. But commodities simply didn’t react. The next 1, 2 and 3 years, with the longest of those horizons concluding in January 2021 saw the all-commodities PPI rise at 0.6%, 0.4% and 1.1% annual rates, respectively. This begs another question: fifty years from now, when people talk about 2020, are washing machines going to be topical at all? If anything was driving inflation dynamics in the year 2020, it was COVID.

When it comes to the last 100 years or so of tariff policy, it is important to review tariff programs in context of all the other important things that were occurring at the time. If someone wants to point to an episode such as Smoot-Hawley and declare forthcoming deflation, we can’t fault them. If someone else points the finger at 1971 to identify inflation, we can’t fault them either. But there are a lot of analysts and strategists right now who are “certain” the U.S. is staring down the barrel of tariff-induced inflation. They may eat humble pie.