When US President Donald Trump took office last January, most economists feared what would happen if he raised tariffs. The expectation was that as the new duties drove up prices of consumer goods and inputs, surging inflation and falling real incomes would follow. This would be a supply shock, so the US Federal Reserve could not do much to counteract it.

Trump did raise tariffs to shocking levels, violating international agreements and blowing up the Republican Party’s oft-professed commitment to free trade. In terms of severity and disruptiveness, Trump’s 2025 tariffs went far beyond the already-harmful tariffs of his first term, and even beyond the infamous Smoot-Hawley Act of 1930. According to the Yale Budget Lab, the average effective tariff on US imports rose from 2% to 18%, the highest level since the 1930s, this year. Add to that the uncertainty caused by frequent and inexplicable policy changes, and large adverse effects on inflation, employment, and real incomes appeared all but inevitable.

But things did not turn out as anticipated. It is possible that consumer price inflation (CPI) did not rise at all: the most recently reported rate, for the 12 months ending in November, is 2.7% – the same level as........

© The Financial Express