The Inflation Panic Is All Wrong. How Tariffs Could Lead to Interest Rate Cuts.

Just one-third of all goods consumed in the U.S. are imported. (STR/AFP/Getty Images)

About the author: Julia Graf is a finance executive who advises the World Bank Group on energy, artificial intelligence, and industrial strategy.

Last week, President Donald Trump once again revived his global trade agenda, imposing “reciprocal” tariffs on a dozen countries. He framed the move as a defense of U.S. economic strength that would deliver “trillions” into the U.S. Treasury. Economists warn tariffs will increase prices; some say Americans will pay about 18% more on imported goods as businesses pass the costs along to the consumer.

But this narrative is likely wrong: Import duties don’t automatically fuel broad inflation. Economists have missed a lesson from Trump’s first term: Tariffs aren’t just trade weapons. They are macroeconomic tools that can deliver targeted price signals, rebalance the economy, and lower interest rates.

What Is Inflation, Really?

Modern inflation commonly refers to rising prices for goods and services. But, classically, it is actually about the money supply. As Milton Friedman famously put it, “inflation is always and everywhere a monetary phenomenon”—too much money chasing too few goods.

By this framework, tariff-driven price increases of specific goods—electronics, furniture, or cars—are one-time price adjustments, not a sign of systemic inflation.

Economists’ preferred gauge of inflation is the consumer price index, which tracks a basket of goods and services paid by households. Foreign goods affected by tariffs make up less than 10% of the total CPI weight. The bulk of the basket—services like housing, healthcare, education, telecommunications, and transportation—aren’t directly affected. Inflation in these areas, as measured by the CPI, has only shown very modest acceleration in recent months.

JPMorgan’s Jamie Dimon has urged a refocus away from price levels. “Tariffs may drive higher inflation, but what we really want is more growth,” he told CNBC last month. “That is far more important than whether inflation ticks up or down a little bit.”

Strategically applied, tariffs can be just that—tools for recalibrating the economy. They steer consumers toward domestic alternatives and postpone nonessential purchases. Higher prices encourage households to spend less, easing demand and slowing down sectors that might contribute to overheating, while stimulating targeted investment.

In this sense, tariffs operate not just as a tax, but as a demand rebalancing tool.

The key is scale. If applied too narrowly, the deflationary effect may be too weak for the Fed to adjust the rates. If too broad or poorly targeted, the policy could push the economy into recession. Politically charged tariffs on Mexico, Canada, China, and India don’t support growth. Their economic impact might be limited, but they surely fuel mistrust and geopolitical instability.

The Bigger Picture

The U.S. economy is more than 70% services, the rest goods. Of those goods, only one-third are imported. So, while tariff exposure is real, its effect should be relatively small. Analysts put the annual economic drag from tariffs at just 0.4-0.6% of gross domestic product—a modest cost for a $30 trillion economy.

But the potential upside is far greater than these risks. If targeting strategic sectors like semiconductors, clean energy, and advanced manufacturing, tariffs can speed up reshoring, bolster economic resilience, and reinforce key supply chains. In an increasingly fragmented and multipolar world, that isn’t just economic insurance—it is a competitive advantage.

We’ve seen this playbook before.

In his first term, Trump placed tariffs on steel, aluminum, washing machines, and various Chinese goods. That produced limited price hikes, ranging from 1.2% on cars to 12-17% on appliances—without sparking broad runaway inflation. Businesses absorbed some costs, and consumers swung to substitutes or delayed purchases. The inflation bump faded quickly, dropping as low as 1.5%. The Fed was then able to cut rates three times in 2019 to stimulate the economy, boosting gains in housing, manufacturing, and capital investment.

More broadly, the trade policy helped pull some manufacturing back. From 2017 to early 2020, the economy added roughly 500,000 manufacturing jobs, outpacing the pre-tariff growth rate. Companies like Samsung and LG opened U.S. plants to sidestep import duties. Existing manufacturers expanded capacity. Though modest in scale, this shift signaled the early momentum of a reindustrialization drive—one the Biden administration later extended through industrial policy, clean energy incentives, and infrastructure investment.

Today’s economy is running hotter, and the scale of Trump’s tariffs is much greater. Yet the Fed’s balance sheet is shrinking. With no expansion of the money supply, chances of sustained, high inflation remain remote. Modest price adjustments will redirect consumer demand, easing inflationary pressures. Lower rates, in turn, will stimulate housing and investment.

More factors will shape the broader outlook. Reshoring is driving new capital investment. Supply chains shortages are continuing to moderate from the Covid-19 pandemic. The stock market keeps hitting all-time highs.

At least one Fed governor, Christopher Waller, isn’t concerned. He recently said he expects inflation to “return to its underlying rate” after a short-term bump. That is because when prices rise, consumers pull back on discretionary spending, indirectly cooling off demand in services. As such, tariffs can help slow consumption and ease inflationary pressure in the broader economy.

New shocks may emerge, altering the long-term path. But judged against today’s realities, there is no cause for panic.

Tariffs aren’t a cure-all for inflation, nor the sole engine for growth. But used with precision, they can pave the way for a stronger, more resilient economy. That’s a trade worth making.

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