I've written about tariffs and inflation separately in this newsletter, but the below analysis by Harry Enten puts the two together and compares how prices have risen, and may continue to rise, with how wages have not kept pace.
For a real-world example, Trump said at the White House that to combat the effect of auto tariffs, he plans to allow people to deduct interest paid on auto loans from their taxes. It sounds like a good idea, except the vast majority of Americans take the standard deduction and do not itemize their taxes.
Enten is our data guru and you're likely to see him on TV talking about public opinion. Here he delves into economics to explain why everyone continues to feel the pinch. It's important as we anticipate more tariffs next week, on April 2, which Trump refers to as "liberation day." What's below are Enten's words:
By Harry Enten
Americans just feel like they can’t catch a financial break. You know the feeling. You go to the grocery store, you look at the prices and you want to channel your inner Vince Lombardi: “What the (heck) is going on out here?”
Worst of all, it feels like it’s only going to get worse. There’s a very good reason for that: Americans may, in a way, get taxed more when they go to buy things – more than they have for a long period of time.
No matter what some people will tell you, tariffs are, in fact, taxes. When you combine the potential tariff rates that the Trump administration could impose on us, the consumer, with the inflation that raged out of control coming out of the pandemic, it feels like things have gotten away from us.
Take a look at a recent report from the nonpartisan Tax Foundation. It estimates that under President Donald Trump’s proposed tariffs, the effective tariff rate will be 8% in 2025. That’s so high that it would go off the page if you were charting tariff rates over the last 55 years.
Indeed, you’d have to go back to the 1960s to find a comparable rate. You’d have to jump in a time machine back to when Americans were still earning World War II victory medals (1946) to find a higher tariff rate on Americans.
The real world consequences of a heightened tariff rate could be a tremendous strain on the American consumer. The Yale Budget Lab earlier this month estimated that Trump’s tariffs could cost the average household $2,000 in inflation-accounted disposable income a year.
The median household income is well under $100,000 per year.
Prices for computers could rise by over 10%, by 5% for natural gas and even over 4% for something as simple as rice if the tariffs take effect.
The average price of a new car could surge to over $50,000.
Now, if we were only dealing with tariffs, it would be one thing. Every so often, prices get much more expensive very quickly.
The issue is that prices have already gotten much more expensive over the last five years because of heightened inflation. The cumulative inflation rate during that period, according to the Consumer Price Index, has been over 23%.
We haven’t had a higher five-year inflation rate in over 30 years. The median five-year inflation rate since the late 1940s is only a bit more than 14%.
To stay with the grocery store comparison, the price of an average chicken is now over $2 more expensive than it was in February 2020. The price of a loaf of white bread is $0.50 more expensive. A pound of ground beef is over $1.50 more expensive.
Now, there are some things that aren’t much more expensive at the grocery store (see bananas), but overall, your bill has gotten significantly larger if you’re buying more than a few items.
Putting tariffs on top of that could be a cross too much to bear for some people. Keep in mind that an estimated 25% to 30% of Americans live paycheck-to-paycheck.
For the rest of the populace, look at how the average person’s income has changed, taking into account inflation and population growth. The growth over the past five years has been 2 percentage points lower than the median year since the early 1960s.
The real wage growth over the last four years, in which Congress passed a massive stimulus package at the beginning of the decade, has actually been -5%! There wasn’t a single four-year period since at least the 1960s prior to Covid where there was anywhere near such a drop in income taking into account inflation.
It’s no wonder that Americans are so pessimistic about the economy. Only once in CNN polling since the coronavirus pandemic began have a majority of Americans said the economy is good.
Of course current or retrospective readings are one thing. Thoughts on the future are another. Belief that the economy would get better has generally been rising, according to the Conference Board.
That was until the last few months. Fewer people are now expecting good things out of the future economy than at any point in over a decade.
After having to deal with inflation and now potential tariffs, can you blame them?
