There has been some debate between Trump critics and Trump defenders about whether tariffs cause inflation. Some defenders, including the Commerce Secretary Howard Lutnick, say that tariffs don’t necessarily cause inflation. My view is that these defenders have a point, but not a good one.It is best to say that tariffs reduce productivity because they prevent the international marketplace from allocating resources to their best use. Lower productivity means lower real incomes. Lower real incomes could take the form of either (1) a higher price level for given nominal incomes or (2) lower nominal incomes for a given price level. Whether (1) or (2) occurs depends largely on monetary policy.When Trump critics say that tariffs raise inflation, they are implicitly assuming case (1). That case may be the more likely one, but it is not necessarily the way things will play out. It would be more accurate for Trump critics to say that the tariffs will reduce American living standards (as well as living standards abroad) without invoking the word “inflation.”  

There has been some debate between Trump critics and Trump defenders about whether tariffs cause inflation. Some defenders, including the Commerce Secretary Howard Lutnick, say that tariffs don’t necessarily cause inflation. My view is that these defenders have a point, but not a good one.

It is best to say that tariffs reduce productivity because they prevent the international marketplace from allocating resources to their best use. Lower productivity means lower real incomes. Lower real incomes could take the form of either (1) a higher price level for given nominal incomes or (2) lower nominal incomes for a given price level. Whether (1) or (2) occurs depends largely on monetary policy.

When Trump critics say that tariffs raise inflation, they are implicitly assuming case (1). That case may be the more likely one, but it is not necessarily the way things will play out. 

It would be more accurate for Trump critics to say that the tariffs will reduce American living standards (as well as living standards abroad) without invoking the word “inflation.”

 Greg Mankiw’s Blog