President Donald Trump’s economic policies in April, specifically his sweeping imposition of tariffs on goods from virtually every country, created a complex and uncertain economic landscape. These tariffs, which pushed America’s average levy on imports to its highest level in approximately a century, were intended to reshape global trade dynamics and potentially bolster the US economy. However, the immediate consequences were not entirely as expected, and the long-term effects remain a subject of considerable debate among economists and policymakers.
One surprising development in April was the slowdown in inflation, despite the implementation of these tariffs. The Consumer Price Index (CPI), a key measure of inflation, rose at an annual rate of 2.3 percent, the slowest pace since early 2021. This figure was even lower than economists’ expectations of 2.4 percent, leading to a positive market reaction. This seemingly counterintuitive outcome prompted questions about the immediate impact of tariffs on consumer prices and the overall economy.
Adding to the complexity, the Trump administration also lowered tariffs on Chinese goods during April. The levy on Chinese imports was reduced from 145 percent to 30 percent for a 90-day period, as the US and China sought to negotiate a more permanent trade agreement. China reciprocated by lowering its retaliatory tariffs on American goods from 125 percent to 10 percent. This partial de-escalation of trade tensions raised hopes that a broader resolution might be possible, potentially mitigating the negative economic consequences of the trade war.
These seemingly contradictory developments—the imposition of broad tariffs coupled with a slowdown in inflation and a partial rollback of tariffs on China—left many Americans wondering about the true state of the economy. Was the economic crisis manufactured by Trump’s trade policies ending before it truly began?
The consensus among economists is that tariffs, in general, tend to increase consumer prices. When companies are forced to pay higher prices for imported goods and inputs, they typically pass on at least a portion of these costs to their customers. This is a fundamental principle of economics, and it is widely accepted that tariffs can lead to higher prices for consumers.
However, the delayed impact of tariffs on inflation in April was attributed to several factors. One key explanation is that US companies had anticipated Trump’s tariffs and had built up inventories of foreign goods and inputs earlier in the year. By drawing down on these pre-tariff inventories, companies were able to keep prices relatively stable in the short term. As Morgan Stanley’s chief economist, Michael Gapen, noted, the goods on store shelves in April were largely based on agreements made months prior to the tariffs’ implementation.
The impact of tariffs on industrial inputs, such as steel and aluminum, also takes time to manifest in consumer prices. Manufacturers need to incorporate these materials into new products before they reach the market. Therefore, cars and washing machines on sale in April were typically built with metals purchased before the tariffs took effect.
However, companies are expected to eventually exhaust their pre-trade war inventories, at which point prices are likely to rise. Several companies have already announced plans to raise prices to offset tariff costs. Mattel, the toy manufacturer, indicated that it would need to increase prices on its toys, while Procter & Gamble, the consumer goods giant, said it would likely need to raise prices on products like Tide detergent and Charmin toilet paper by July. Early signs of tariff-induced price increases were already visible in April’s CPI report, with furniture costs jumping 1.5 percent compared to March.
Trump’s decision to reduce tariffs on China offered some relief from the prospect of sharply rising prices. However, even with this rollback, America’s average tariff rate remained at a historically high level of 17.8 percent, according to Yale’s Budget Lab. If these tariff rates remain in place, the Budget Lab estimates that prices will rise by 1.7 percent this year, costing American households an average of $2,800.
The longer-term question is whether tariffs will trigger a one-time surge in prices or lead to a more sustained inflationary cycle. Tariffs are often compared to sales taxes, which typically lead to a one-time price increase but do not necessarily spark ongoing inflation. In fact, sales taxes can potentially slow price growth over the long term by reducing consumer demand. Higher prices can reduce disposable income, leading to less spending on goods and services, which could eventually force businesses to lower their prices.
However, the magnitude and breadth of Trump’s tariffs raised concerns about potential disruptions to supply chains and potential shortages. At the same time, proposed tax cuts by House Republicans could increase the deficit by roughly $5 trillion over the next decade. Increased government deficits can inject more money into the economy, boosting demand.
The combination of constrained supply due to tariffs and increased demand due to tax cuts could create an inflationary spiral. Consumers might rush to stockpile products before they become scarcer and more expensive, thereby exacerbating the shortages and driving up prices further. Additionally, if workers respond to tariff-induced price hikes by demanding higher wages, and employers respond to wage demands by raising prices, a self-reinforcing inflationary cycle could become entrenched.
For now, investors appear to believe that this worst-case scenario is unlikely, even as higher prices are widely anticipated. Before Trump’s partial rollback of tariffs on China, many Wall Street forecasters had begun projecting a recession by the end of the year. JP Morgan put the risk of a US recession in 2025 at 60 percent, while Goldman Sachs pegged it at 45 percent. However, following the US-China agreement, both brokerages reduced their recession odds.
Wall Street’s newfound optimism partly reflects the direct consequences of the US-China agreement. According to the Budget Lab, that deal reduced the expected negative impact of Trump’s tariffs on prices and growth by 40 percent.
However, the relief also reflects a broader assessment of Trump’s willingness to scale back his trade demands in the face of economic challenges. The agreement, which technically only pauses Trump’s 145 percent tariffs for 90 days while trade talks continue, signaled that Trump was willing to compromise, even without significant concessions from China.
Trump’s statement that his goal in ongoing trade talks with China is to "open up" China to American goods also suggests a more modest objective than fully ending America’s trade deficit with China, which he had previously deemed a precondition for any agreement. If Trump focuses on increasing US farmers’ access to the Chinese market, a permanent trade agreement may be easier to achieve.
Beyond the US-China trade relationship, Trump’s willingness to scale back tariffs suggests that he might be willing to do the same with other tariffs if inflation or unemployment were to surge. This makes it less likely that America will enter a severe economic crisis. However, tariff rates remain historically high, and Americans are still likely to face higher prices and weaker economic growth in the coming years due to the trade war initiated by Trump. This suggests that the trade war might be a losing proposition for the US economy.
