The new tariffs on aluminum and steel products that may or may not be coming — but seem, as I write, to be walloping stocks either way — are a bad idea. They will hurt the industries that use steel and aluminum, which employ many more people and add more to our economy than the steel and aluminum industries themselves. And they will invite retaliation.
Will they also increase inflation? It’s a claim I’m seeing a fair amount in the early Twitter reaction to Trump’s announcement. It’s true, but with an asterisk. Tariffs function as a one-time negative supply shock, like a drought or a hurricane or a slowdown in technological development. They will tend to push prices up and pull output down — to make inflation higher and the economic-growth rate lower.
But this rise in inflation would be different from the kind we usually talk about. It would not presage a continually rising trend in inflation. (If we got such a rising trend, that is, it would be coincidental and not a result of the tariffs.) And it shouldn’t — although it might — prompt the Fed to tighten monetary policy. A negative supply shock already brings output down, and there’s no reason to compound the problem with a misguided monetary response.