Trump's Tariffs Are Helping the Fed Close in on Its Price Goal
Tariff-spurred inflation isn’t the sort of demand-based price gain that the Fed is really aiming for.
(Bloomberg) -- As President Donald Trump announced several waves of tariffs that ultimately extended to more than $250 billion of imports, Federal Reserve economists and policy makers alike warned that they posed a risk to growth.
Now that the first signs of the spat are feeding into hard data, it’s becoming clear that the tiff is also helping the Federal Reserve to achieve one of its dual mandate goals.
America’s central bank is tasked with maintaining full sustainable employment and inflation that’s stable at a low level, which it has defined as 2 percent. In 2018, the Federal Reserve nearly hit its target on a sustained basis for the first time since it formally adopted it in 2012 -- and economists at Goldman Sachs Group Inc., UBS Securities LLC, and the New York Fed itself find that the trade spat has been a significant factor driving prices higher.
Goldman Sachs analysts wrote in a Jan. 21 note that tariffs have bolstered prices more than they’d initially suspected. Domestic producers opportunistically increased the prices they charged in response to higher trade restrictions -- in effect, they used the policy as cover to eke out some pricing power, they find. They also analyze nine consumer price categories directly impacted by tariffs, and find “sharp divergence relative to the other core goods categories.”
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Goldman’s crew thinks the levies are currently pushing up core inflation by around 0.15 percentage points, plus “perhaps another few basis points in the pipeline from spillover effects.”
The New York Fed offers an even more aggressive estimate. Their analysis, which looks at industry-level Producer Price Index increases, finds a significant and quick reaction to tariffs that -- if extended to consumer prices -- could have pushed 2018 inflation higher by about a third of a percent.
Over at UBS -- where the team includes Alan Detmeister, former head of the Fed Board’s price and wage division -- economists expect tariffs to boost prices by 0.1 percentage points this year, assuming the hit to the most recent tranche of Chinese imports remains at 10 percent instead of rising to 25 percent in March. Interestingly, that’s just slightly less than the effect of the current tight labor market. The researchers have low unemployment lifting prices higher by 0.15 percentage points.
The concerning news inherent in this finding? Tariff-spurred inflation isn’t the sort of demand-based price gain that the Fed is really aiming for. If the trade tiff is resolved, the central bank could find itself missing its goal by even more.
Also worth a read this week...
Wealth inequality is on the rise, but the magnitude hinges on which data source one consults. In a new National Bureau of Economic Research working paper, University of California Berkeley’s Gabriel Zucman writes that both survey and tax data suggests that the top 1 percent owned 40 percent of all wealth in the economy in 2016 -- up from at least 25 percent in the 1980s. For China, Europe, and the U.S. combined, he writes that the richest 1 percent hold about a third of all wealth today.
Measurement holes might still plague the data thanks to tax evasion. In Norway, counting for hidden wealth increases the riches of the top 0.01 percent by 25 percent, an analysis of available and leaked data suggests. And the effect is probably bigger elsewhere. “Scandinavians own a relatively small fraction of their wealth offshore,” Zucman writes.
Harvard University’s Emmanuel Farhi and Matteo Maggiori argue in this working paper that China is likely to challenge the U.S.’s dominance in both international monetary and price systems in the coming decades. The pair point out that China has made significant steps to internationalize the yuan, and the currency is increasingly used for trade invoicing. Central banks have started holding the yuan in their official reserves, with the amount doubling to $193 billion in U.S. dollars as of 2018 from around $90 billion in 2016, based on International Monetary Fund data.
“The expansion of China’s role in the international monetary sphere is still in its infancy, but its fast and predictable growth makes it one of the most important long-term disrupting forces,” the pair writes. They argue that China’s rise could erode America’s exorbitant privilege -- the idea that the U.S. can’t face a balance of payments crisis because the dollar is the world’s reserve currency -- and might force the U.S. to reduce its debt down the road.
Massachusetts Institute of Technology economist Kristin Forbes thinks something is missing from inflation accounting: globalization. Trade flows, emerging market economic heft, and the increased ease of shifting production to cheaper locations have changed how unemployment and prices relate to one another -- and that relationship continues to shift over time.
“It is noteworthy that despite the substantial amount of attention paid to globalization in a wide array of venues, there has been little attempt to better incorporate these changes in the global economy into standard frameworks for modeling inflation,” she writes in this St. Louis Fed quarterly review article. “It is time to more explicitly include a role for ‘Shanghai, Saudi Arabia, and supply chains’ in our inflation frameworks."
To contact the reporter on this story: Jeanna Smialek in New York at jsmialek1@bloomberg.net
To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Sarah McGregor, Alister Bull
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