Liberation Day Tariffs: A Requiem for a Failed Theory
The inflation hawks had a simple theory: tariffs meant price hikes. Importers would pass costs to consumers. Domestic producers, shielded from foreign competition, would raise prices too. Democrats insisted on calling the tariffs a “national sales tax.”
February’s consumer price index (CPI) and producer price index (PPI) data, the last clean read before the Supreme Court’s IEEPA ruling wiped the Liberation Day tariff regime off the books, show neither happened. That dog didn’t bite.
Start with the CPI. The all-items index rose 2.4 percent year-over-year in February, unchanged from January. Core inflation, which excludes food and energy, also held flat at 2.5 percent. Month-over-month, core goods rose just 0.1 percent. Year-over-year, core goods are up just one percent. These are not the numbers of an economy absorbing a massive tariff shock.
Look specifically at the categories where pass-through was supposed to show up most visibly. New vehicles, one of the most heavily tariffed imported goods categories, were flat, with zero change month-over-month and up only 0.5 percent for the year. Toys, a category the media screamed about loudly, actually fell 1.3 percent over the year. Television prices fell 0.8 percent for the month and are down 4.1 percent from a year ago. Shoe prices tumbled 0.5 percent in February and are up just 1.5 percent. Major appliances? These rose 0.2 percent in February and are up just 1.3 percent from a year ago.
Here and there, you can see signs of possible tariff inflation. Household furniture prices rose sharply last year. Women’s clothing prices climbed 2.9 percent, although this was somewhat offset by the fact that men’s clothing rose only 1.2 percent. Jewelry and watches saw big price hikes. But in the context of broader consumer prices, these are more the exceptions that prove the rule.
The indirect pricing power thesis fares no better. The broad category of consumer durables actually fell half a percent at the consumer level.
Producer Prices Show No Secondary Inflation
The PPI tells the same story, and it matters because the PPI is where indirect tariff pressure would show up. The argument was that domestic producers, suddenly insulated from foreign competition, would exercise newfound pricing power and raise prices on their own goods. The data finds no such exercise. The final demand goods less food and energy, rose only 0.3 percent in February. Durable consumer goods at the producer level were flat on the month and up only 3.3 percent for the year, running below the 3.4 percent broad final demand index.
Finished consumer goods less foods and energy were up just 0.3 percent as well. The PPI’s personal consumption goods less foods and energy rose only 0.5 percent for the month, with a 12-month reading of just 1.6 percent. That is disinflation territory relative to where that index was running a year ago.
Then there is the trade services line, which is where the tariff inflation story doesn’t just fail — it actively inverts. Final demand trade services, which measures margins received by wholesalers and retailers rather than the price of goods themselves, rose 0.4 percent in February and is up 5.2 percent for the year, well above the headline final demand index of 3.4 percent. Intermediate trade services for both manufacturing and non-manufacturing industries similarly expanded.
This matters because it forecloses the last escape hatch for the tariff inflation argument. The standard Americas are paying story runs: foreign exporters raise dollar prices, importers absorb or pass on costs, consumers pay more. If consumers weren’t paying more and domestic margins were actually expanding, the costs weren’t being quietly absorbed somewhere in the American supply chain either. Widening margins at the wholesale and retail level are the signature of a seller with pricing power, not one eating a cost shock.
But that pricing power was not aimed downstream, at the consumer. If it were, we would have seen it in the consumer price data. The most parsimonious explanation is that the tariff burden was being borne upstream, by foreign exporters cutting their own prices to hold market share, effectively eating the tax themselves. That is precisely what the administration argued would happen, and what the standard incidence models used by the tariff critics said couldn’t happen at scale. February’s PPI says otherwise.
What did drive February inflation? Energy, food commodities tied to weather disruptions — a 48.9 percent jump in fresh and dry vegetables at the producer level drove much of the final demand food spike — and services. Shelter is still running at 3.0 percent year-over-year. Medical care services came in at 4.1 percent. These are entirely pre-existing structural pressures with no relationship to trade policy.
The tariff inflation story was always more model than reality, built on theoretical incidence assumptions that critics presented as settled empirical fact. February’s data, the last observation before the policy was struck down, is the cleanest test we are likely to get. The pass-through that was confidently predicted, whether direct through imported consumer goods or indirect through domestic pricing power, simply did not materialize.
Somewhere between the economics department and the checkout line, the great tariff inflation failed to arrive.
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