Here’s why Trump’s tariffs may not result in price gains — and how inflation could actually decline

Stock image of a woman grocery shopping.

Inflation has declined significantly from its 9.1% peak in 2022, when supply-chain disruptions, oil prices, and fiscal and monetary stimulus sent prices of basic goods skyrocketing.

Thanks in part to the Federal Reserve’s tightening measures, the consumer price index has fallen to 2.6%, approaching the central bank’s 2% target.

However, President-elect Donald Trump’s proposed tariff policies have the potential to throw a wrench into that progress. Many economists and Wall Street analysts have warned about the negative impact of tariffs on an economy, from rising prices as companies pass down costs to revenue declines.

Anxious investors, however, should examine the historical record, which shows that tariffs don’t always result in higher prices. Here are some reasons Trump’s tariff policies, if enacted, may not exacerbate price gains — and why inflation may instead decline.

The costs of tariffs are not always passed on

Marta Norton, the chief investment strategist at the financial-services firm Empower, points out that Trump combined two seemingly inflationary policies — tariffs and tax cuts — during his first term with little impact on inflation.

“In 2017, we saw a meaningful reduction in taxes, but over the following two years, inflation pressures barely budged. January 2018 was also when we saw Trump’s first round of tariffs go into play,” Norton wrote in Empower’s 2025 economic outlook.

Indeed, the CPI measure for December 2018 was 1.9% despite these policies, and it stayed low throughout his presidency.

“Those tariffs did not create inflation. Why? China did not pass through the higher costs,” Mary Ann Bartels, the chief investment strategist at Sanctuary Wealth, wrote in a November note.

A study by the National Bureau of Economic Research that analyzed the impact of the tariffs passed in 2018 found that foreign countries absorbed nearly half the cost of the steel tariffs.

Wholesalers also may not pass all the added costs of imported goods to consumers, LPL Financial’s chief economist, Jeffrey Roach, said. As the below chart shows, wholesale prices increased more than consumer prices in both 2018 and 2019.

Further, Trump previously exempted certain businesses from tariffs, excluding over 2,200 products during his first term, Roach said.

Consumers and investors should also consider that both Norton and UBS Global Wealth Management have said elevated housing costs in recent years contributed significantly to soaring prices.

Inflation is trending lower

Some experts argue that inflation could moderate going into 2025.

Bartels believes crude-oil prices will remain low amid weaker demand, especially given China’s sluggish economy. Deregulation and increased export activity under Trump could also boost the domestic natural-gas economy. Energy costs have a large impact on inflation, which would bode well for the Fed’s goal of tamping down prices.

UBS also predicts relief in the housing market, which could further aid the fight against inflation.

“We also expect inflation to keep falling, even if selective tariffs contribute to a one-off increase in some prices,” Mark Haefele, the chief investment officer of UBS Global Wealth Management, wrote in the bank’s 2025 outlook, adding: “US goods prices have been in deflation for the past three years, while stubbornly high shelter prices are easing.”