WASHINGTON — Inflation was picking up in mid-2021 as the world emerged from COVID and hundreds of billions of dollars in federal pandemic aid had started flowing, but President Joe Biden assured Americans the price increases were just a speedbump on the road to a stronger economy.
“Some folks have raised worries that this could be a sign of persistent inflation. But that’s not our view,’’ Biden told reporters. “Our experts believe and the data shows that most of the price increases we’ve seen are … expected to be temporary.’’
But Biden turned out to be wrong and it’s widely believed inflation cost the Democrats the White House last year. Now, just as the Federal Reserve has wrestled inflation back down close to normal, President Trump could be making the same political mistake with his sweeping new tariffs, in which he argues any short-term pain is worth the long-term benefit of forcing more manufacturers to produce goods in the United States.
“There’ll be a transition cost and transition problems,’’ Trump said Thursday, “but in the end, it’s going to be … a beautiful thing.’’
One of those “transition problems’’ will be higher inflation, economists warn, and the past four years have shown how difficult it is to corral once it’s unleashed.
“We’re just now getting back to a place where inflation is close to being stabilized, but it’s now got the threat of yet another shock,’’ said Diane Swonk, the chief economist at audit and consulting firm KPMG.
US importers — the ones who pay the tariffs — are likely to pass on some if not all of those costs to their American customers, driving up prices, economists said. And this time, it may be tougher for the Federal Reserve to rein in high inflation, as experts are forecasting the tariffs will also cause an economic slowdown in the United States this year, and quite possibly a recession.
Even after Trump backed off and paused many of his tariffs for 90 days Wednesday, enough remain in place — including those on China and a new one at 10 percent on almost every trading partner — that Swonk estimated the US tariff rate is now more than 10 times higher than it was at the end of last year, at 2.8 percent.
“Any way you cut it,’’ Swonk said, “it’s the largest tax hike on the US economy in the modern era.’’
Key White House officials denied tariffs will cause inflation because they expect foreign exporters to eat the cost. But many economists doubt that and The Budget Lab at Yale University estimates the tariffs will cost the average US household $4,700 over the next year.
“Some of their economic officials have said there won’t be price increases, that this will be absorbed, and that’s not something I would recommend any economic officials saying because I think we’re likely to see them,’’ said Jason Furman, an economist at Harvard’s Kennedy School who chaired President Barack Obama’s Council of Economic Advisers. “It’s almost inevitable that this is going to drive inflation up and unemployment up.’’
That worries some congressional Republicans.
“The bottom line is it’s the consumers who pay, and that can most certainly add to the inflationary trends that are out there,’’ said Senator Mike Rounds of South Dakota, a major agricultural state that stands to be hit hard by the new tariffs China has slapped on the United States in response to Trump’s. “We need trade deals. The real question is, are we going to be able to do some trade deals when we’re looking at these types of tariffs? My producers are really concerned about that.’’
Democrats are prepared to pound Trump on higher prices just as Republicans did to Biden after annual inflation hit a four-decade high of 9.1 percent in June 2022.
“Donald Trump promised on day one that he would lower prices,’’ said Massachusetts Senator Elizabeth Warren. “He has gotten way out of step with the people who voted for him.’’
While prices have not gone down since Trump took office in January, inflation has been trending in the right direction. The Labor Department reported last week the consumer price index declined slightly in March, the first monthly drop since 2020. The annual inflation rate fell to 2.4 percent, close to the 2 percent level the Fed considers ideal.
But the report doesn’t take into account Trump’s major tariff increases this month. Moody’s Analytics estimated that just the tariffs in place now will push inflation back up over 5 percent over the next year. Americans are already bracing for impact, with consumer confidence plunging this month and expectations for inflation to soar, according to a University of Michigan survey.
Fed officials also are readying for a more complicated inflation fight.
“We face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation,’’ Fed Chair Jerome Powell said on April 4. “While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent.’’
The Fed’s main tool to bring down inflation is the central bank’s benchmark interest rate, which officials raise to make borrowing more expensive and slowly reduce spending. The effort usually causes a sharp increase in unemployment and a recession. But Fed officials have managed to lower inflation significantly so far without that collateral damage.
The new inflation threat is a more difficult challenge for the Fed because it’s expected to be accompanied by a sharp economic slowdown. Fed officials normally would cut interest rates to boost spending to try to stave off a recession, but that would fuel higher inflation. So they could be stuck between an economic rock and a hard place.
“This is a Federal Reserve Board member’s nightmare,’’ said Heather Boushey, an economist and senior research fellow at Harvard Kennedy School’s Malcolm Wiener Center for Social Policy.
The worst-case scenario would be stagnant economic growth and high inflation, a debilitating mix known as “stagflation’’ that plagued the United States in the 1970s when the Fed failed to aggressively raise interest rates to push down rising prices. Because of that history, and the experience of the past several years, Fed officials have signaled they’ll prioritize keeping interest rates high to fight inflation over lowering rates to boost economic growth.
Adding to the problem is the uncertainty Trump has created by his chaotic tariff policies, said Boushey, who served on Biden’s Council of Economic Advisers.
“I cannot say with any certainty by the time I get home from walking my dog what the tariff rate will be,’’ she said. “It’s hard to know if President Trump will blink again.’’
White House press secretary Karoline Leavitt dismissed the drop in consumer confidence Friday and urged Americans to be patient in the face of potential economic trouble, comments that echoed Biden administration officials in 2021.
“As he said, this is going to be a period of transition,’’ Leavitt said of Trump. “He wants consumers to trust in him and they should trust in him.’’
Jim Puzzanghera can be reached at jim.puzzanghera@globe.com.
