Chicago Booth Review Podcast Trumponomics: Expect Higher Inflation—with or Without Tariffs

Michael Weber: Certainly there are consumers in the survey that think that the biggest chunk of the increase in tariffs will be borne by foreign producers, but on average, actually that's not the case. We really see quite stark in the data that people really think that prices of goods will increase and not only actually of goods imported from countries that will actually face potentially higher tariffs, but also domestically produced goods.

Hal Weitzman: Tariff is the most beautiful word in the dictionary. According to Donald Trump, the US President ran promising to increase duties on all imports, particularly those from China, Mexico, and Canada, even before he took office. Was that promise already affecting the US economy? Welcome to the Chicago Booth Review Podcast, where we bring you groundbreaking academic research in a clear and straightforward way. I'm Hal Weitzman. Today we're launching a new series about Trumponomics. We're going to give you the Chicago Booth Review perspective on the White House's economic policies starting with tariffs.

Chicago Booth's Michael Weber has conducted research that documents how consumers have for months been shopping in anticipation of tariffs being put in place. Our conversation was recorded last week after the Trump administration had implemented and then quickly rescinded tariffs on Colombia. But before they threatened to implement tariffs on Mexico and Canada before putting those on pause and before they got into a tit-for-tat tariff feud with China. Most economists agree that tariffs effectively act as a sales tax, raising prices for imports and for goods produced domestically. Consumers seem to agree and have been hoarding goods, behavior that looks set to raise inflation and set the Trump administration on a collision course with the Federal Reserve. Michael Weber, welcome to the Chicago Booth Review Podcast.

Michael Weber: Thanks a lot for having me, great being here.

Hal Weitzman: So we had to have you on because your most recent research is about tariffs, which is of course as we know Donald Trump's favorite word apparently. And I wanted to start by asking you, the political analysts say that at least some of the tariff talk is bluster or signaling and negotiation. And of course the first actual tariff that was put in place by the Trump administration was against Colombia for refusing to accept deportees. And it worked I guess, and Colombia quickly relented and changed its path. But it sounds from your research like consumers are taking it seriously and they're changing their behavior accordingly. So just tell us what is the sort of top line finding?

Michael Weber: Yeah, no, totally. So I definitely can see that especially if you look at the previous Trump presidency, that the announcement of future tariffs was used as a negotiation tool to extract [inaudible 00:02:53] from our trading partners. I would be a little bit cautious and maybe extrapolating too much from the previous experience, given that in the first week we've seen that Trump-Forty-Seven is already quite different from Trump-Forty-Five in the sense that it's still possible that on Saturday we might see in fact tariffs increased on our biggest trading partners, Mexico and Canada, and at least through the lens of our consumer survey, we do see that many Americans expect that actually we'll see substantial increases in tariffs across the board with the highest expected increase for goods imported from China, but also goods imported from Europe, Mexico, Canada, and actually around the world are expected to increase through the lens of consumer surveys.

Hal Weitzman: Consumers at least seem to be taking it seriously. They're braced for it. They don't think it's just a negotiating move that will then secure some political end or eventually lower trade, maybe lower tariffs.

Michael Weber: No, no, totally. So in our survey we actually just find that consumers expect the tariffs to be around like 35% across the board with the largest increase to happen for goods from China. So in that sense consumers think it'll happen, I guess as we'll discussed in a bit where they also already took actions to partially shield against the consequences they're expecting.

Hal Weitzman: Yeah, and those increases, you're talking about 35% that's more than has actually been touted, right? What's actually been talked about is about, is 25%, right?

Michael Weber: Yeah.

Hal Weitzman: Well it's not clear.

Michael Weber: It varies a lot depending on which messenger and when you look at the announcements. So there's been a wide range of increases, but definitely it's higher than.

Hal Weitzman: Okay. So tell us, you found that consumers expect these tariffs to be put in place and presumably they expect them to last. That's what you're saying, they expect them to be put in place for the duration of the administration or what did you ask and what did you find?

Michael Weber: We've been running surveys on what's called the Nielsen panel since 2018. The way to think about it's a panel of 50,000 Americans that in terms of demographics are as representative as you can think. And one of the nice features of this panel is that given the large size, you also have many survey participants and in fact have ministerial duties like hiring people, setting prices, making investment decisions. And so we can actually shed light on what people expect to happen not only from a worker's and consumer's perspective, but also through the lens of a ministerial or firm perspective.

And so what we did see in the survey was that especially consumers as we discussed, expect this pretty stark increase in tariffs and that just don't want to kind of wait for it to happen. But in fact, actually they already took preemptive actions because they indeed seem to actually anticipate that tariffs will go up and as a response has started to stockpile goods that are kind of higher value in particular from countries where they expect the biggest increases in taxes or tariffs when come to the similarity with taxes I guess in a little bit.

And you also see in particular that they already kind of started to kind of increase less savings in liquid forms, so they hold more money in cash to engage in precautionary behavior. I think what's also certainly quite noticeable in the data if you ask them, think about a hypothetical increase in tariffs by 20 percentage points, who do you think will share the burden or who will pay for this increase in tariffs? And maybe contrary to some of the political announcements referred, American consumers expect that the lion's share will be paid by them. So they expect that 50% of the increase in tariffs will be born into higher prices consumers face and roughly the remaining 50% being split equally between domestic producers and foreign producers.

Hal Weitzman: Which as you say is fascinating because a lot of the popular wisdom either I guess some of the White House economic advisors have been saying this won't have an effect on prices, which makes huge assumptions about no retaliation and that kind of thing. And the other one that we've seen, which we were talking about before we started recording was the sort of popular myth, or not myth, but popular narrative, let's put it like that, that most people who voted for Trump didn't really understand what tariffs are, how they work. They sort of think that somehow China will pay tariffs or Mexico will pay tariffs and not US consumers. What I found fascinating about your research is that actually shows that voters are a lot more savvy than those narratives suggest, right?

Michael Weber: Certainly there are consumers in the survey that think that the biggest chunk of the increase in tariffs will be borne by foreign producers, but on average, actually that's not the case. We really see quite stark in the data that people really think that prices of goods will increase and not only actually of goods imported from countries that will actually face potentially higher tariffs but also domestically produced goods. The rationale is actually pretty straightforward and simple. If I now face as a domestic producer lower competition because like my foreign competitors face higher tariffs, what happens effectively? I have a higher degree of pricing power. And of course firms will take advantage of that, but partially also they need to because even if I produce domestically here, let's say in Illinois, I will not have everything produced here, but I will also need to import part of my intermediate inputs for production.

They will become more expensive. My costs go up, I have higher pricing power, of course I will pass on the increase in my input costs into output prices. So even if tariffs would indeed be very, very effective in the sense that Trump hopes for that we increase domestic production, we kind of import less from abroad, will still actually lead to an increase in inflation domestically. Because even in such a hypothetical and very extreme scenario, you would still see that domestic producers will increase their prices.

Hal Weitzman: And you're saying they might increase their prices because components have become more expensive, but they might increase them just because they have the opportunity to.

Michael Weber: Exactly. Less competition means higher pricing power.

Hal Weitzman: I want to understand what you think the effect is. So people are, consumers are stockpiling cash, it sounds like they're stockpiling goods particularly from countries and what kind of thing are we talking about there? Do you have a sense of that from your survey?

Michael Weber: Yeah, consumer electronics, storables, anything you can think of, on the one hand doesn't kind of get bad overnight, but also especially coming from countries where we at least consumers expect the highest tariffs like goods imported from China, those are the type of goods. Also like clothes, certainly it's among the goods that people seem to be stockpiling over, yeah.

Hal Weitzman: And they're specifically doing that because they expect tariffs not because of some feel-good reaction to the Trump election like we've seen and the stock market is generally traded up, people generally feel like there's going to be lower taxes, so they might be feel exuberant, but it's not that.

Michael Weber: The stockpiling behavior is especially kind of prevalent amongst other participants that self-identify as supporting the Democratic Party, which I would be surprised that they feel especially good. If you look at the Michigan survey data, those tend to be consumers that kind of like in simplified terms, we are a bit depressed now and they see kind of the economic outlook really kind of bad and they're the ones that do actually the stockpiling. So I don't think it's because of a consumption-wealth effect because now stock markets have done so well, maybe absent today.

Hal Weitzman: I'm interested in your view on what the aggregate economic effect is. If you're saying that companies are sort of holding off because they're waiting to see what happens with tariffs and presumably the effect that will have on their components and supply chains and at the same time consumers are spending more now, what is the sort of aggregate effect of that? Does it all kind of wash out or what do you think is the effect of this hoarding on the economy?

Michael Weber: If you think about it, if it's not really the case that consumers go out and start kind of stockpiling and we don't see in the short run a big increase in the supply of goods at the same time because firms anticipate higher kind of costs in the future, they already start increasing prices today. What you'll see is actually that the persistence in inflationary pressures, which we've seen over the last two years will just keep actually going up. Which of course then also means that the Federal Reserve is in actually a really tough spot.

On the one hand you see kind of heightened pressure coming from the White House on lowering interest rates, but at the same time many of the policies that are implemented by the White House, if anything, actually increase inflationary pressure. So taking those two pieces together, I would expect that we will see less cuts in interest rates that people were thinking maybe even like at the end of last year because of the heightened inflationary pressure based on consumer's behavior. But of course also based on other policies that we might potentially see happening pretty soon. If you think about the US economy, the labor market is already pretty tight, then you potentially remove million of workers from the labor market making the labor market even tighter.

Hal Weitzman: [inaudible 00:12:50] by the immigration policies there.

Michael Weber: Exactly paired with what we discussed earlier, that firms will have increased pricing power given that of course it's great for American workers, their wages will go up. But that of course means that the cost of reduction for many firms, especially in the service sector keep rising where the share of the wage bill is pretty high. They will of course then pass through their increased cost of production because of higher wages again into output prices putting additional upward pressure on inflation. And so I would say the Fed is in a really tough spot and we should see potentially quite a bit of upward pressure on inflation dynamics.

Hal Weitzman: If there's pressure on inflation and we don't know whether the tariffs are really going at the time of recording, whether the tariffs, the big tariffs, the ones on Mexico, Canada, and China are really going to go ahead. I mean it sounds like this effect is happening regardless of whether the tariffs happen or not. So we may see inflation regardless of policy.

Michael Weber: No, totally. At least what the firms and households say in the survey, they already did take actions. Firms clearly said because they anticipate an increase in tariffs and because of that higher cost, partially because the cost of inputs will go up, partially because they need to realign their supply chain, which is just maybe too much [inaudible 00:14:13] stock to say we need to buy stuff from somewhere else but China because of that, they will have to pay higher costs and they already take actions now. Maybe now going back to a little bit, kind of like economics theory, if you know that you can only increase your prices in a staggered fashion every couple of months and you have an opportunity now, you take already actions. If you think in the future your costs will be higher. So even though we will never see an increase in tariffs and the increases in input costs we're discussing might not even actually materialize, kind of part of the damage is already done because firms already take action.

Hal Weitzman: How quickly, so when did you do a survey and how quickly could we expect to see, are we already seeing it?

Michael Weber: So we did the survey starting in the second half of December of last year until the first week of this year, and a third of firms said they already started increasing prices. So I think next reading of the CPI and the PPI data, we'll definitely already see part of the anticipation of Trump's tariffs policies taking effect.

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Hal Weitzman: Okay. Michael Weber, in the first half the episode we talked about the tariffs and how inflation is coming, whether there's tariffs or not, which is pretty scary. I mean if there are tariffs, do they effectively work as a tax increase for US consumers and if so, does that mean that consumers are just doing what they would normally do ahead of a telegraphed tax increase? We know there's a tax increase coming in six months time we spend today. Is that particularly perfectly rational behavior you would expect?

Michael Weber: That's definitely another quick question, Hal. So as we discussed in the first half already to some extent, naturally we should expect the prices of goods coming from abroad to go up. But for the reasons we also mentioned already previously, even the goods that are produced domestically, we would expect to become more expensive. Of course what that means, it's effectively as if we had a national sales tax and that sales tax is going up. So now in the US of course we do not have a sales tax, but in many other countries, including many of the European countries, there's the value added tax. And in some previous research, actually we did study what happened in my home country, Germany when Angela Merkel took the chancellorship in 2005 and when she became chancellor in November 2005, she pre-announced that 14 months later she would increase the value added tax from 15 to 18 percentage points.

What did consumers do in Germany at the time? Well, you ask them what do you think will happen to prices? They were anticipating a port-based increase in inflation across the board. If you look at what they say, what do you plan to do? They were saying, I plan to buy larger ticket items. Germans, of course they lost their cars. They started going out to purchase new cars all the way up until December of 2006 when you saw actually real durable and non-durable consumption growth going through the roof. January of 07, taxes actually started to be higher and actually consumption started to plummet. In that sense, we would expect that something very similar like might materialize in the US, part of it we already see happening and potentially once we actually see an increase in tariffs, even economic output, we should also be concerned that growth will just be lower because of that effective increase in taxes.

Hal Weitzman: I see. So you're saying there will be an increase in taxes, but there might be a decrease in consumption.

Michael Weber: Once actually the increase is in effect indeed, yes. Right now beforehand people start stockpiling spend before it's effective and then once it's in effect, most likely we should see it.

Hal Weitzman: Well, does that mean that the increase in prices won't last?

Michael Weber: That's a great point. So if a consumer demand is lower, then of course you would expect that prices potentially would also be lower. Now it's ultimately a question of what happens to the cost of production and who's ultimately then bearing the tariffs. But this may be too much of forecasting on my behalf, so that's something we'll need to keep studying indeed.

Hal Weitzman: But I mean again, it's interesting that the consumers are not fooled. They know that a tariff is effectively a tax.

Michael Weber: Indeed, yes, they totally understand that. And while you definitely sometimes see on social media that some people are surprised that maybe, to maybe use the language as well was used in the kind of previous election campaigns like that China would pay for it. Most consumers are aware that they will need to pay a big chunk.

Hal Weitzman: Right. And interestingly, tariff is, as we said, is Trump's favorite word apparently, but tax is certainly not. So the fact that consumers equate the two is kind of interesting. And digging into your survey, you looked at Democrats voters attitude versus Republicans and no surprise that they are on opposite sides when it comes to tariffs and Democrats oppose them. But Republicans aren't really excited in your survey about tariffs, are they?

Michael Weber: Yeah, no. So it's definitely the case that even among Republicans, the support for tariffs is not uniform. But if you look on average, you see that Republicans support tariffs about twice as much as Democrats. But as I mentioned, even many Republicans are not very favorable of higher tariffs. But you definitely do see that that's again, almost bipartisan. Both Democrats and Republicans do expect that domestic production will go up and in particular the pass-through of higher tariffs into domestic production at least when kind of benchmarked against historical and empirical evidence seems to be quite on the high side. So definitely expect a way higher increase in domestic production than what most economists are anticipating. And those increases in domestic production will be of course very focused in certain industries, whereas the increase in prices will likely be across the board. And so if you might benefit whereas the big chunk of the population, they will actually suffer because of higher price levels that we'll see going forward if Trump follows through with the policy.

Hal Weitzman: Yeah, but that's kind of interesting in itself because I guess sometimes there were surveys, would you pay higher taxes if they were universal healthcare or whatever? And many Democrats would say yes, they would be prepared to pay higher taxes. I wonder if given that Republican voters see that tariffs are effectively taxes, is it possible that they might say, well, I don't mind paying a bit more to first of all equalize or make fair or whatever they perceive to be our trade policy and second to, as you say, to increase American industry, to make American jobs that's worth paying tariffs for? I don't know, is that possible?

Michael Weber: Not certainly possibility at the same time, one of the big reasons why I think we see Trump back in the White House is certainly the experience of many ordinary Americans with price developments in the most recent two years. And so I would be a little bit cautious in saying that Republicans fully understand that we need to pay a price for having an increased domestic production, at least from my looking at the data, they might over perceive the benefits and partially underestimate the costs in terms of higher prices and maybe we keep seeing strong domestic growth going forward and maybe then like a counterfactual dip of 0.2 percentage points in growth because of higher tariffs. No one will notice. That's of course really hard to say, but maybe that's just saying that's part of the price I'm paying for having ultimately my preferred candidate back as president of the US indeed.

Hal Weitzman: Right. In a similar way, I was just thinking that most economists don't like tariffs, but there also has been in the past decade and more a lot of serious academic research by very prominent people documenting the so-called China shock, the loss of well-playing middle-class industrial jobs because of trade with China. And so as you say, this survey shows people feel that these tariffs will have a big effect on domestic production, maybe bigger than economists think, but there's trade-off there, isn't there, at least in the minor voters between jobs and inflation. And I'm just saying maybe they're prepared to trade off a little bit of inflation to create more industry.

Michael Weber: Totally. So I definitely see that consumers totally have this in mind that they think that ultimately we need to pay a little bit of a higher price for a kind of increased domestic production. Now again, I just think that they are overestimating the benefits of such a policy and maybe underestimating the costs because as we discussed in the first half, with a already pretty tight labor market, firms having increased pricing power, if indeed we see higher tariffs because of lack of competition, what will happen will of course, we see wages of American workers going up, that's of course a great thing. But of course it just also just means that the costs of firms go up and they will have an easier way of passing through those higher costs into prices. So because of that mechanism and a potential, what we sometimes refer to as wage price spiral effect, we should see actually a larger increase in inflation, second round effects because of the price pressure due to higher wages.

And that seems to be, at least at the moment, not fully on the radar of most of our participants in the survey, but again, who are we to judge as economists? Sometimes we have to be a bit more humble and maybe look at what consumers think and ultimately they are the electorate and they decide on who is kind of in the White House and which policies are implemented. As you alluded to earlier, like the American electorate is certainly not as naive, not thinking that ultimately they will face higher costs. The question is how much higher will be prices? And our job as economists is ultimately measurement and to some extent education.

Hal Weitzman: Okay. And you referred in the first half to... I mean inflation it sounds like is coming regardless of what happens. It's just a question of how much inflation and if there are tariffs, it's going to be worse than if there aren't. But it's interesting you referred to the Fed and I think a lot of people are expecting there might be a confrontation between the administration and the Fed because obviously the administration it sounds like is going to create inflation even though it says it's not going to, which it could then easily blame on the Fed. And the Fed will presumably be trying to control inflation by pushing up interest rates, which will damage the stock market and other things that Trump really cares about. So do you anticipate that this is going to happen, this confrontation between the Fed and the Trump administration and how will it play out do you think?

Michael Weber: Definitely. And we already saw Jay Powell in one of the more recent press conferences directly saying that he checked with his lawyers. There's no way Trump could actually get rid of him. And so certainly the Fed is really concerned about political pressure and the Fed is rightly concerned about it. Because as we already saw in the previous Trump presidency, he is at the time clearly used Twitter to put pressure on the Federal Reserve and actually it does have an effect on the perception of the public on whether they think the Fed is kind of neutral, bipartisan and [inaudible 00:26:45] in some other recent work we actually documented. We had first done this in April of last year where we did a survey, the perceived political bias of the Federal Reserve. And at the time Republicans thought that the Fed is Democratic leaning, whereas Democrats also thought actually it's way more Republican leaning. We had in hypothetical in the [inaudible 00:27:07].

Hal Weitzman: That's good if both think it's the other [inaudible 00:27:09], that's what it should be.

Michael Weber: But so we also had what do you think happens under scenario that Trump gets elected and both Republicans and Democrats stated the Fed will be way more Republican leaning. Now what we did on January 20th, we had a new survey in the field to see whether actual perception line up with the hypotheticals from April of last year. And that's what you see, do you see now that both Republicans and Democrats think that the Fed going forward will actually be way more Republican leaning. They also have now very bipartisan, a very dichotomous polarized view in terms of trust in the Federal Reserve to care about price stability.

And many Democrats think now the Fed will ultimately maybe not hike sufficiently to keep inflation in check, which of course like in all the distributional impacts of inflation on especially hurting like low-income Americans. It's now way beyond of course the scope of our conversation. But it's definitely like I see many concerns and red flags going forward that there will be a fight between the Federal Reserve and the White House in terms of appropriate policies going forward. The Fed carrying about its dual mandate and price stability in particular. Whereas the White House, I think at some point as Trump famously said that he's a low-interest rate person, certainly pushing for the Fed to keep cutting interest rates.

Hal Weitzman: Well, as you say, this is too big conversation to have now Michael, but hopefully we can have you back Michael Weber, thank you very much for coming on the Chicago Booth Review Podcast.

Michael Weber: Pleasure was mine. Thanks a lot Hal.

Hal Weitzman: That's it for this episode of the Chicago Booth Review Podcast, part of the University of Chicago Podcast Network. For more research, analysis, and insights, visit our website at chicagobooth.edu/review. When you're there, sign up for our weekly newsletter so you never miss the latest in business-focused academic research. This episode was produced by Josh Stunkel. If you enjoyed it, please subscribe and please do leave us a five-star review. Until next time, I'm Hal Weitzman. Thanks for listening.