Macro Minute: Week of March 24, 2025
I feel like I need to tackle a misconception that I am seeing everywhere. That is that tariffs are inflationary. On the surface that sounds correct, but let’s think through how this affects prices. I am going to fall back on my economic education here for a minute so bear with me as I draw some supply and demand curves.
In the above graphic I created, the green line is the amount of goods a producer is willing and able to make at a given price. The blue line is the amount demanded at a given price. Notice as the price goes down the amount demanded goes up. As the price increases the amount demanded goes down. The intersection of the blue and green lines is the market; the amount a producer is willing to make and a buyer is willing to pay.
When a tariff is introduced, it artificially raises the producers’ cost curve. That is the red line; it is where a producer can make the good profitably. Notice what happens. The quantity demanded goes down at that new higher price. Some people that were willing to buy before are now unable to at the new higher price. This will cause a slowing of economic activity. It will end up being deflationary, not inflationary. Because we are a market-based economy, as less quantity is demanded, less money will be multiplied. Said another way, fewer dollars will be exchanged causing less dollars to be traded for that good. Because less goods are being demanded, less employees are needed to produce at that new lower quantity. It trickles down the line that other goods and services will be demanded less because less people are employed. Continuing this thought, it will lead to a slowing of the economic engine that is the consumer.
I have no idea how all of this will play out. I acknowledge that other things are being promoted and stimulated at the same time tariffs are being implemented. If financing rates come down, then that alone can outweigh the impact of tariffs. I just wanted to visually show how a tariff alone is not in fact inflationary, but instead deflationary, through a slowing of economic trade.
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