Economic pundits have been celebrating of late that thus far we haven’t seen a deep spike in inflation due to the imposition of tariffs on foreign goods sold in the US. In other news, thus far the lint in my pocket has had little impact on the WNBA standings. I am not a fan of tariffs, which I addressed earlier here. I’m certainly not a fan of inflation. I’m even less a fan of anyone who thinks the two correlate.
The confusion is partly driven by politics, partly by misleading measurements. People confuse inflation with rising prices in part because politicians cause inflation and prefer to blame it on business. The price of gas goes up and suddenly Bernie Sanders is screeching about greed in the C suite at Exxon. But the good people at Exxon don’t decide the price of gas. The people at the pump do.
The misleading measurement is found in the calculus of inflation. Every month of so we are treated to the latest numbers on “inflation.” These numbers are actually a measure of the change in price for a certain group of goods, the CPI, or Consumer Price Index. Last month a gallon of gas cost x, a loaf of bread y and a box of paperclips z. This month those same products are 1% more expensive, giving an annual inflation rate of 12%.
The truth is inflation is an increase in the money supply, something only the government can do. Such does cause prices to rise, for a simple reason that has nothing to do with anyone’s greed. It’s because there’s more dollars chasing the same goods. If an economy produced ten loaves of bread, and had ten dollars in circulation, each loaf of bread would cost a dollar. Add ten more dollars and the economy isn’t any richer. Now a loaf of bread costs $2.
What has this to do with tariffs? Everything. Tariffs do nothing, in themselves, to increase the money supply. Which is why they don’t cause inflation. They certainly, like any other cost of doing business, can raise the cost of doing business. Which doesn’t, contra general economic illiteracy, mean they can simply pass those costs on. Prices are still determined by what consumers are willing to pay. As noted, I’m not a fan.
Which is not a good reason to erroneously blame tariffs for inflation. Every bit of inflation can be traced back to government borrowing and printing money into existence. Not wealth, but money. If tomorrow the government told us we could all add three zeroes to our bank balance, we would not be any richer. We’d just add three zeroes to everything we want to buy.
Economics isn’t terribly complicated. It is just enough so that politicians and demagogues are equipped to fleece us year after year. Don’t invest in battles with the dimwitted. Instead learn a little and be equipped for battle.
For more lessons in economics from a biblical perspective, see my Economics for Everybody here.