There is no shortage of internet articles and bloviating rhetoric from
left-sided economists and politicians about how the tariffs proposed by
President Trump will be inflationary and hit the pocketbooks of Americans.
One notable economist and former U.S. Treasury Secretary, Larry Summers, slammed President Trump’s tariffs as a self-inflicted wound on the US economy and warns they will fuel inflation within months.
This inflationary concern is also echoed by Mark Zandi, the chief economist of Moody’s Analytics, who recently shared that President Trump’s tariff plan would raise inflation and cost U.S. jobs.
A recent internet news article by USA TODAY (February 16, 2025) - “Why Trump’s plan for sweeping tariffs could ‘shock” inflation back into gear” - warned that President Donald Trump’s plan to hit imports from foreign countries with sweeping reciprocal tariffs could nearly double U.S. inflation if fully imposed, according to a recent study, intensifying a recent resurgence in consumer price increases.
Not all economists agree with this Peter Crying Wolf bleak inflationary message. For example, Kevin Hassett, an economic adviser for President Trump recently said that long-held beliefs by nearly every economist that tariffs will raise prices are “just false.”
Who is right and who is wrong? Each economist obviously has statistics to prove their point. Do we resolve these differences of opinion by channeling Mark Twain who once said, “There are three kinds of lies: lies, damned lies, and statistics.”
Or does this add further support to a popular expression of yesteryear that economists are paid liars?
In America, inflation is typically measured by several economic indices with the most popular being, perhaps, the Consumer Price Index.
According to the U.S. Bureau of Labor Statistics, the Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available.
From January 2024 to January 2025, the Consumer Price Index for All Urban Consumers (CPI-U) increased 3.0 percent, after rising 2.9 percent over the 12 months ending December 2024.
One of the drawbacks of the CPI, which measures the cost of a hypothetical basket of goods and services, is that it is static, the items of goods and services in that hypothetical basket remain constant. It fails to consider what is known as substitution bias. Substitution bias occurs when prices for goods and services change relative to one another. For example, the price of beef goes up greater than the cost of chicken.
Failure to consider substitution bias in the calculation of inflation via the CPI is that it results in this inflationary measure to overstate the true rise in the cost of living because it does not consider that people can substitute away from goods whose prices rise disproportionately.
Substitution bias is the power of American consumers doing what they do best, shopping for the best price for the goods and services they need and can afford. It is an example of skipping the beef and buying the chicken for dinner.
Let’s also consider a less well-known force that can be described as the skip bias. If the cost of food goes up by, say, ten percent, skip, or eat, ten percent less food and you have cancelled the inflationary cost of food. What a great way to jumpstart the mission of Robert F. Kennedy, Jr., the new U.S. Secretary of Health and Human Services, of “Make America Healthy Again.”
President Trump’s tariff proposals will not be an inflationary nightmare for smart American consumers who have a keen sense of substitution bias in their shopping for goods and services. These smart American consumers will always be the boss of inflation.
Pax Domini sit semper
vobiscum
