Economist Paul Krugman argues that the recent impact of trade policy on consumer prices is a solved equation, with actual data showing that tariffs have increased U.S. inflation by exactly 0.8 percentage points.
The 0.8% Reality
Addressing what some have called an economic mystery, Krugman asserts that there “isn't really a puzzle here” regarding why inflation didn't spike further following recent trade hikes.
By analyzing total customs duties as a percentage of GDP, Krugman identifies in his Substack post that tax receipts rose from 0.3% of GDP pre-Trump to 1.1%. This 0.8 percentage point increase serves as a direct “first-pass estimate” of the inflationary impact.
The data is reinforced by the HBS Pricing Lab, which estimates that the Consumer Price Index (CPI) is currently 0.8 percentage points higher than it would have been without the tariffs.
This aligns perfectly with 2025 core PCE inflation nowcasts, which sit at 3%—exactly 0.8 points above the 2.2% forecast made before the tariff spree. Krugman notes that while “lots of wiggle room at the edges” exists, the results are “almost too neat.”
Debunking The ‘Straw Man’
Krugman suggests that the perceived “puzzle” of low tariff inflation is a narrative tool rather than a mathematical reality.
He notes that “Trumpists are happy to promote a straw man” by claiming experts were wrong, when in fact the modest rise in prices matches the actual—not headline—tariff rates.
The discrepancy between “headline rates” and “effective rates” is attributed to various carve-outs and corporate maneuvers.
Specifically, high tariffs prompted firms to utilize exemptions “that were already on the books but weren't worth the paperwork when tariffs were lower.”
Policy Of Exemptions
The limited inflationary impact is partly due to major carve-outs, such as Apple Inc.'s (NASDAQ:AAPL) exemption from tariffs on India, and a surge in USMCA exemption claims for imports from Canada and Mexico.
While some economists may have “overhyped” the initial threat, Krugman concludes that the reality is “more or less in line with what we should have expected.”
Benchmark Indices Witness A Mixed Week
The top U.S. indices closed mixed in the last week, with the S&P 500 index rising 0.23% over the 5 trading days and the Nasdaq Composite, along with the Dow Jones index, falling by 0.29% and 0.50%, respectively.
The SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 index and Nasdaq 100 index, respectively, closed lower on Friday. The SPY was down 0.30% at $691.97, while the QQQ declined 1.20% to $621.87.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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