What happened
A recent study by the New York Fed on the impact of tariffs on inflation has been found to have a flaw in its methodology. The study attempts to measure the effect of tariffs on prices by comparing the price growth of tariffed goods to non-tariffed goods. However, the study's counterfactual scenario, which assumes that non-tariffed goods prices would have moved independently of tariffed goods, has been questioned.
The study's chart shows that the price growth of non-tariffed goods actually declined when tariffs were introduced, and then recovered when the tariff effect wore off. This suggests that the prices of non-tariffed goods are not independent of tariffs, but rather are affected by them. The study's assumption that non-tariffed goods prices would have moved independently of tariffed goods is therefore flawed.
An alternative explanation is that higher prices for tariffed goods led to a decrease in spending on other goods, causing their prices to fall. Once the tariffs were fully priced in, the squeeze on spending eased, and other prices recovered. This explanation is supported by the study's own chart, which shows that the prices of non-tariffed goods moved in lockstep with the prices of tariffed goods.
