From January to August the average tariff rate on all imported goods increased 9 percentage points, from 2.3% to 11.3%, while the price of those imports, recorded by the Bureau of Labor Statistics (BLS) excluding tariffs, was essentially unchanged. Hence, the price of imports, including tariffs, rose 1.113/1.023 - 1 = 8.5%, reflecting the full amount of the increase in tariffs (Chart 1, solid lines). This suggests the cost of the tariffs has been borne entirely by American businesses and consumers, with none of that cost passed backwards to foreign suppliers.
Introducing
Joel Prakken
in:Our Authors
Joel Prakken is past Chief US Economist of S&P Global and IHS Markit, co-founder of Macroeconomic Advisers, and past president and director of the National Association for Business Economics. He has served as an outside advisor to the Congressional Budget Office, on the Advisory Panel of the Bureau of Economic Analysis, and as a consultant to the Joint Committe on Taxation. He holds a bachelor's degree in economics from Princeton University and a PhD in economics from Washington University in Saint Louis.
Publications by Joel Prakken
- USA| Oct 01 2025
Are Foreigners Paying the Tariffs?
by:Joel Prakken
|in:Viewpoints
- USA| Aug 27 2025
Holy Rate Cut Batman...
...was the reaction in financial markets after the latest employment report showed that, including revisions, growth of establishment employment slowed to a crawl over the last three months. Investors, who before that report were convinced the Fed will maintain its policy rate in the range of 4¼% - 4½% at the September meeting of the FOMC, are now equally convinced the Committee will cut the rate by ¼ percentage point, a shift in sentiment re-enforced by dovish remarks delivered by Chair Powell at the Fed’s annual shindig in Jackson Hole.
While not religious about it, I do find the Taylor rule a useful framework for contemplating the short-run dilemma facing the Fed as it attempts to satisfy the dual mandate of low inflation and high employment. For a given “neutral” real (i.e., inflation-adjusted) federal funds rate – today we call it real “r-star” – the original rule showed the Fed: (1) raising (lowering) the nominal policy rate by 50 basis points for each percentage point that real GDP exceeds (falls short of) potential GDP; (2) raising (lowering) the policy rate by 150 basis points for each percentage point that inflation exceeds (falls short of) 2%. The value of real r-star itself is not observed directly, only inferred from empirical models. However, the Fed’s Summary of Economic Projections (SEP) reveals policymakers’ views on the matter. For example, the June SEP shows, in the long-run, inflation of 2% and a nominal funds rate of 3%, implying a value of real r-star of 1% - unchanged from December’s SEP.
Another familiar rule in macro is Okun’s law relating changes in the unemployment gap to changes in the output gap. Using a typical textbook version of Okun’s law, the Taylor rule can be restated to show the Fed lowering (raising) the funds rate by 100 basis points for every percentage point that the unemployment rate exceeds (falls short of) the full-employment rate. The current unemployment rate is 4.2%, slightly below CBO’s estimate (= 4.3%) of the “non-cyclical” unemployment rate, while the 12-month change in the core PCE price index is 2.8%. If real r-star is 1%, then current values of the unemployment rate and inflation imply an appropriate policy rate of 4.3%, exactly equal to the funds rate in July.
From this perspective the Fed should be in no hurry to ease policy and, by cutting rates, risks perpetuating inflation above the 2% objective. The argument for a rate cut is that continued slow growth of employment will soon lead to rising unemployment that, through the Phillips Curve, will reduce inflation risks associated with a one-off increase in tariffs, allowing the Fed preemptively to shift its focus to the employment half of the dual mandate.
This is a demand-side narrative that may prove out, but there is a supply-side story to tell here as well. With each employment report the BLS publishes monthly data on the labor force that tautologically is the product of population and the labor force participation rate. In Chart 1, the orange line depicts the recent 12-month percent change of this series. Unfortunately, it is contaminated by “population controls” introduced by the BLS each January. Fortunately, the BLS publishes alternative monthly estimates of employment by age and gender that smooth through the population controls. By multiplying the reported participation rate into this alternative series for population, I calculated a smoother version of the labor force (blue line). Over the last year, but especially in 2025, its growth has slowed from 1½% to zero as the participation rate has fallen, especially among foreign-born workers – the consequence of fear engendered by the Trump Administration’s policies on immigration. And this surely understates the actual deceleration in the labor force because estimates of recent population growth do not yet reflect the sharp reduction in immigration – especially border crossings - over the last year.
Why does this matter? Firstly, addressing the current clamor for a rate cut: growth of employment that is lethargic because it is constrained by slow secular growth of the labor force does not necessarily imply a cyclical rise in unemployment requiring rate cuts under the Taylor rule. Indeed, along a steady-state path with no growth in the labor force, I would expect monthly changes of employment to be zero with a constant unemployment rate. Secondly, however, it is standard macro that, all else equal, slower growth of the labor force is associated with a lower equilibrium real interest rate – i.e., a lower real r-star. The logic is that a deceleration in the labor force results in a relative excess of capital the puts downward pressure on the rate of return.
To get an empirical feel for this I fired up my macro system - which, on its supply side, is a Solow growth model – and calibrated it to the current economy assuming the real r-star of 1% shown in the recent SEPs. Then I reduced the annual growth rate of the labor force to zero from a baseline value of 0.7% (the most recent 10-year average) and held it there through 2028 before allowing a gradual recovery. With the Taylor rule maintaining the economy close to full employment, the system kicks out the inferred change in the real r-star. The results of this experiment are shown in Chart 2. They show the deceleration in the labor force is associated with a decline in real r-star that averages about ¼ percentage point through 2028. This could justify the Fed cutting the nominal policy rate even with the economy near full employment and inflation running above target.
None of this is precise. There are unobservable considerations and ceteris that may not be paribus. While in the minority, there are Fed watchers worried that by cutting rates now, the FOMC may validate inflation above 2%. It is a legitimate concern but, thinking about it from a supply-side perspective on the economy, I find that risk a little less concerning.
by:Joel Prakken
|in:Viewpoints
- USA| Jul 21 2025
Waiting for (Tariff) Inflation...
In Samuel Becket’s renowned play, Vladimir and Estragon wait for Godot, who never arrives. It’s like waiting for the inflation impact of recent tariff increases…or is it?
On April 2, “liberation day,” the Trump Administration announced a baseline 10% tariff on most imported goods and additional “reciprocal” tariffs, quickly delayed until August, on select countries. This was on top pf other new tariffs on vehicles, parts, steel, aluminum, and other select commodities. I estimate that by June these initiatives increased the import-weighted average of tariff rates on goods - call it the “statutory” tariff rate - by 17.5 percentage points, to 20%. At May’s volume of imports, that implies an increase in the “run rate” of customs duties of nearly $600 billion at an annual rate, a staggering rise. If passed fully forward, it would lift the aggregate price level by roughly 1.7%. Yet so far, despite economists’ warnings, any impact on inflation has been difficult to discern. Why?
One reason is that imports temporarily surged early this year as importers rushed to beat the anticipated increase in tariffs (Chart 1). Until the resulting excess stocks are worked down, merchants can postpone selling goods subject to the new tariffs, delaying price pressures arising from the recent increases. But is there even more to it than that?
by:Joel Prakken
|in:Viewpoints
- USA| Jun 10 2025
On the One Hand, OBBBA; On the Other, Tariffs
Before the 2024 presidential election my uncontroversial view of the near-term economic outlook was that real GP would grow near 2% for the next few years with the economy remaining near full employment, inflation subsiding towards 2%, and the Fed gradually cutting its policy rate. I assumed the personal provisions of the Tax Cuts and Jobs Act (TCJA) would be extended beyond 2025, and that both the limitations on state and local tax (SALT) deductions and the temporary business provisions in TCJA would sunset as scheduled under current law.
Now Congress is debating the One Big Beautiful Bill Act (OBBBA) while courts decide the legality of new tariffs imposed by the Trump Administration. Here I offer thoughts on how, directionally, these policies, if enacted, would shift my view of the near-term outlook for real GDP growth. To organize my discussion, I’ll group the policies like this:
• OBBBA o Extend TCJA o New tax cuts o New tax increases o Increased spending by the Department of Homeland Security o Spending cuts, including Medicaid • New tariffsLet’s begin by asking how much failure to extend TCJA might undermine near-term growth. I’m skeptical of estimates suggesting the impact to be large but, given limitations here on space, a picture is worth thousands of words. The nearby chart shows annual real GDP growth from 2011 through 2024, including the first two years (2018 and 2019) when TCJA was in effect, but before COVID punctuated the near-term outlook. Then, like today, the economy was near full employment with inflation near the Fed’s 2% target. I don’t see a significant pickup in growth during those two years even though, as its centerpiece, TCJA cut the corporate tax rate to 21% permanently. Perhaps not all ceteris are paribus here, but would I expect failure to extend the other provisions of TCJA to have a big negative impact on near-term growth? No and in any event, as mentioned above, I expected the personal provisions of TCJA to be extended.
To help finance the reduction in the corporate tax rate, TCJA made other business tax cuts temporary and also included subsequent business tax increases. For example, under current law “bonus depreciation,” which has fallen from 100% in 2018 to 30% in 2025, ends next year. Limitations on deductions for interest and depreciation of R&D expenditures were implemented in 2022 and 2024. Here OBBBA would not extend current policy but rather would revive the initial TCJA provisions for five years. It also makes the TCJA treatment of certain foreign earnings permanent. I’d not assumed these “extensions” of the business provisions of TCJA, so I consider them new tax breaks that would boost my forecast.
by:Joel Prakken
|in:Viewpoints
- USA| May 07 2025
Tariffs, the Phillips Curve, and the Fed’s Cruel Dilemma
In 1973, matriculating from Princeton, I submitted to William Branson my senior thesis entitled “The Nature of the Phillips Curve” in which I examined the trade-off between inflation and unemployment. I’ve been fascinated with the curve ever since.
Thought on the curve has advanced over the years. Milton Friedman’s “natural rate” hypothesis became widely accepted, implying no long-run trade-off exists. Empirical representations of “sticky” prices and inflation expectations, once combined in lagged inflation rates, are now separated into a backward-looking component for sticky prices and a forward-looking component for (usually survey-based) long-term expectations. Successful monetary policy anchored inflation expectations near the Fed’s now-explicit 2% target, and with that success the slope of the curve flattened. Supply shocks, which temporarily worsen the short-run trade-off, have been added to the curve for food and energy prices, the exchange rate and, most recently, COVID-related disruptions to supply chains. But decades later, the dilemma for monetary policy presented by the Phillips Curve remains unchanged: in the short run, with expectations anchored, the Fed chooses between higher inflation or lower unemployment. The risk of choosing lower unemployment is expectations becoming unmoored, pushing inflation persistently above 2%. The risk of choosing lower inflation is recession.
Today there is a new supply shock to consider: tariffs. Approximately 10% of “core” (excluding food and energy) personal consumption expenditures (PCE) are imports: 6% directly as final consumer goods, 4% indirectly as inputs to the production of final consumer goods and services. Hence, the 10% universal tariff threatened for July by the Trump Administration, if “passed through” entirely and immediately to consumers, would add approximately 4 percentage points to the annualized rate of core PCE inflation in the third quarter of this year. My own work suggests pass-through is delayed and incomplete, with about 75% of the tariff appearing in consumer prices within one year, and 88% within two years. Still, this would be a significant inflation shock. In could be squashed by tight monetary policy, but at what cost?
Using a “modern” Phillips Curve for core PCE inflation described in 2016 by (then) Fed Chair Janet Yellen at the annual meeting of National Association for Business Economics, I explored the horns of the Fed’s current dilemma. First, I generated a baseline forecast assuming no tariffs, unemployment at 4%, and expectations at 2% (Chart 1). After 2025, baseline inflation (4-quarter percent change) fades fairly quickly to the Fed’s target. Then, I introduced a 10% tariff shock while assuming the Fed maintains unemployment at 4%, again with expectations at 2%. When the tariff is thusly “accommodated” by monetary policy, inflation remains above 3% through 2026, and above 2.5% through 2027 – high enough and for long enough to make any central banker uncomfortable. Would expectations remain anchored at 2%? Perhaps, even probably, so: they did during the much bigger COVID-era price shock.
by:Joel Prakken
|in:Viewpoints
- USA| Mar 31 2025
Inflation and a 10% Tariff
As the Trump Administration moves forward with tariffs on a range of imported goods, it is useful to establish a benchmark for the potential inflationary effects of tariffs. To do so I modeled the impact on the price index for domestic demand plus exports of a 10% tariff on all imported goods, one proposal of then-candidate Trump.
First, some historical context. Chart 1 shows the average tariff rate on goods since 1929 and, for 2025, the rate implied by a new 10% tariff on all imported goods. Under the proposal, the rate jumps from 2.5% to 12.5%, a level not seen since the Great Depression, reminiscent of the infamous Smoot-Hawley tariff of 1930, and undoing decades of negotiations to reduce international barriers to trade.
by:Joel Prakken
|in:Viewpoints