Opinion: Tariffs are taxes — not inflation

There is a persistent — and arguably misguided — tendency to conflate tariffs with inflation. But tariffs, like VAT or GST, are ultimately taxes. And once we reframe them as such, their role in inflation becomes less clear-cut, and current central bank thinking begins to look increasingly muddled.

When VAT or GST is introduced, few economists would argue it constitutes sustained inflation. It may cause a one-time jump in price levels, but inflation, properly defined, is a sustained increase in prices and price expectations. If a tariff were inflationary in the way some suggest, then removing it should be deflationary — a claim rarely made with any conviction.

Indeed, lowering a consumption tax should, if anything, be inflationary in the medium term. Consumers with more disposable income tend to spend more. And when demand rises faster than supply can adjust, prices increase. This is Economics 101.

What tariffs do, in effect, is shift income from consumers and importers to the government — just as any tax does. The key macroeconomic risk they pose is not inflation, but demand destruction. Tariffs raise the cost of imported goods, which can weigh on household consumption and corporate margins, potentially triggering a broader economic slowdown.

This is the real danger — not a wage-price spiral, but the chilling effect of policy-induced cost pressures. And it is here that central banks, particularly the Federal Reserve, may be misreading the moment.

With core inflation falling and forward expectations well-anchored, the Fed has scope to act. The greater threat lies not in a re-acceleration of prices but in rising unemployment and weakening demand. If that’s where the cycle is heading, rates will need to come down anyway. Why wait?