When US President Donald Trump announced a swath of tariffs on virtually every US trading partner on April 2 – which he dubbed “Liberation Day” – most economists had the same warning: prices will rise. What’s more, Trump’s plan to deport millions of undocumented migrants and his adviser’s idea to weaken the US dollar would add to the buoyant pressure on prices.
Exactly three months on, those inflation distress calls appear to have been misplaced: the inflation rate was 2.4% in May, within touching distance of the Federal Reserve’s 2% target, and far below the rates seen in 2022 under former President Joe Biden – even with the dollar having its worst start to a year in over 50 years.
So why haven’t prices skyrocketed, as some economists warned?
First of all, not all the tariffs have even been imposed. When US treasury markets began to suffer following the announcement of “retaliatory tariffs,” Trump pulled back, pausing these extra taxes until July 9. What’s left of his new tariff policies are a 10% across-the-board levy – even these were briefly invalidated – a 55% rate on Chinese imports (down from 145%), and sectoral duties on goods like steel, aluminum, and auto parts. The US president has also allowed for a smattering of exemptions, most notably on smartphones and computers – those must have been a rotten Apple.
Secondly, businesses have made choices that have put a cap on price hikes.
Part of this is simply due to firms waiting for Trump to finalize his tariffs plans before they start passing on the higher costs to consumers, per University of Missouri economics professor Joseph Haslag.
“During the heyday of the negotiations, I don’t think anyone wanted to start raising prices until they knew what the final deal was going to look like,” he said.
Some of it is also thanks to forward planning. When Trump initially announced the tariffs, some firms stocked up on inputs before the duties came into effect. This has allowed them to hold prices as they continue to sell inventory that was purchased at pre-Liberation Day prices.
Finally, there are some economic factors that are putting downward pressure on prices, per Haslag. The economy is slowing, reducing demand and lowering inflation rates. What’s more, artificial intelligence may have already started helping firms to lower prices: it boosts worker and business productivity, allowing them to produce more in less time and at less cost.
Trump feels validated. The president will see the misguided warnings of high inflation as the latest example of the media and the “deep state” trying, and failing, to take him down – he lauded the low inflation rates during a May speech in Saudi Arabia. As such, he will feel that he has the green light to continue advancing other elements of his agenda, safe in the belief that any cautions from the “establishment” can be shot down as “fake news.”
Aren’t those “reciprocal tariffs” coming back though? Affirmative – they return just one week from now, and Trump’s plans are still up in the air. He has only negotiated one trade deal – with the United Kingdom – despite saying soon after “Liberation Day” that he had made 200. Treasury Secretary Scott Bessent hinted that there might be some flexibility on the timing, which would be in line with the president’s past actions.
“July 9 is not a drop-dead date on which tariffs are going to be implemented across the board,” said Haslag. “We’ve had other sorts of deadlines that have come and passed over the past few months with regards to tariffs.”
The chickens always come home to roost. For any political gains Trump may have made thanks to lower-than-expected inflation rates, this upcoming deadline for the reciprocals creates a major dilemma for Trump: either he “chickens out” again, as one columnist jokingly suggested, or he actually imposes these hefty duties. The Fourth of July celebrations this weekend may not be as expensive as once feared – will Americans be able to say the same for Labor Day, Thanksgiving, or even Christmas?
