Could Tariffs Spark Covid-Like Inflation? One Fed Official Is Wary

Key Takeaways

Tariffs proposed by President Donald Trump could disrupt supply chains and stoke inflation, much like the cascade of price increases that ripped through the economy during the pandemic, one official at the Federal Reserve warned Wednesday. 

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, spoke at an auto industry symposium Wednesday afternoon. Goolsbee said the broad tariffs Trump has threatened to impose on Mexico and Canada, and the tariffs put in place against China could ripple through the economy in unexpected ways, possibly setting back the Fed’s efforts to bring inflation down to a 2% annual rate.

Goolsbee’s speech highlighted the uncertainty surrounding Trump’s policies and how they’ll affect the nation’s economy. Economists have predicted that Trump’s proposed 25% tariffs against Canada and Mexico and the 10% tariff he has imposed on Chinese products could push up consumer prices.

Goolsbee said he’s considering those tariffs in light of what happened during the pandemic. Disruptions in the supply of a few crucial products caused prices to shoot up and created a domino effect that spread far and wide, taking policymakers by surprise.

For example, he noted how a temporary slowdown of computer chip manufacturing had consequences far beyond what anyone anticipated.

“No new cars meant shortages at rental car companies, so prices there soared. Rental car companies tried holding on to their existing cars longer, so the supply of used cars dwindled, and used car prices soared. Delivery and logistics companies that rely on cars to conduct their work began raising prices as their costs rose. And so on and so on. This played out over years, not weeks—and in some ways is still happening.”

Inflation got as high as 9.1% annually, according to the Consumer Price Index, spiking in 2022 but fading away after that. It’s now nearly, but not quite, down to pre-pandemic levels. The inflation surge roiled the economy, hurting household budgets and possibly even angering voters enough to sweep President Joe Biden’s Democratic party out of power in the November 2024 elections.

Goolsbee’s view contrasted with that of Susan Collins, president of the Federal Reserve Bank of Boston, who said earlier this week that the Fed might “look through” an uptick in prices due to tariffs. Such increases could, in theory, be one-time rather than inflationary, which is, by definition, a sustained acceleration in prices.

The Fed had held its key fed funds rate at a two-decade high for more than a year until September in an effort to discourage borrowing, slow the economy, and push down inflation.

However, with inflation staying stubbornly above 2% recently and Trump’s election bringing uncertainty about federal economic management, the Fed opted to hold rates steady in January. Financial markets are now trying to guess when more rate cuts are coming, if at all.