The Inflation That Tariffs Can't Explain
Federal Reserve economists predicted that tariffs would add roughly 1 percentage point to core inflation, according to the Federal Reserve Bank of Minneapolis. By January 2026, core goods inflation had climbed to 1.9 percent year over year, compared with a pre-pandemic average of negative 0.6 percent, per the same analysis. Researchers examining which specific products showed price increases found that categories with minimal tariff exposure contributed most to inflation, while heavily tariffed goods showed little price movement.
New motor vehicles, a category with high predicted tariff exposure, contributed almost nothing to inflation, the Federal Reserve Bank of Minneapolis reported. Clothing, home furnishings, and appliances showed modest but persistent price increases despite facing low tariffs. The accounting framework that economists used to forecast tariff impacts produced different results when tested against specific product categories.
Core PCE inflation stood at 3.1 percent in January 2026, 1.1 percentage points above the Federal Reserve's 2 percent target, according to the Federal Reserve Bank of Minneapolis. If tariffs explained approximately 0.5 percentage points of that increase, other factors accounted for the remaining gap.
The Substitution Shell Game
Tariff predictions assumed static trade flows. In reality, countries facing steeper tariffs shipped fewer goods to the U.S., while countries with below-average tariff rates shipped more, per the Tax Foundation. Of roughly $258 billion worth of imports hitting U.S. retail markets in June, 48 percent faced tariffs, the Tax Foundation found. The average tariff rate that month was 9 percent, compared with 15 percent that many economists had forecast earlier in the year.
Bangladesh's share of EU apparel imports rose to 21 percent by 2025, while India's declined to 5 percent, according to trade data. Similar patterns emerged across categories as supply chains reorganized around tariff structures. The accounting framework used to predict tariff impacts did not capture these substitution effects at a granular level, the Federal Reserve Bank of Minneapolis noted.
Exemptions created gaps between announced and realized tariffs. Pharmaceuticals, some electronics, and many imports from Canada and Mexico remained exempt from new tariffs, per the Tax Foundation. A large tariff announced on pharmaceutical imports did not take effect, with realized effective tariffs on pharmaceutical goods remaining close to zero, according to the Federal Reserve Bank of Minneapolis. U.S. retailers built up inventories earlier in the year in expectation of higher tariffs, the Tax Foundation reported, creating a buffer that delayed price impacts.
The Accounting That Doesn't Add Up
Using realized tariffs through December 2025 rather than announced rates, the accounting framework calculated that tariffs added 2 percentage points to core goods inflation, equivalent to 0.5 percentage points on core PCE inflation, the Federal Reserve Bank of Minneapolis found. This estimate aligned with the lower end of the 0.5 to 1 percentage point range that various analyses had suggested. Core goods inflation was running at 1.9 percent, meaning tariffs could explain approximately one-quarter of the increase.
The pattern within disaggregated PCE goods categories differed from tariff impacts predicted by the accounting framework, according to the Federal Reserve Bank of Minneapolis. Categories with the biggest contributions to inflation in 2025 had faced low tariffs. The framework produced estimates when applied broadly but showed different results when applied to specific product categories.
Based on a 2015 to 2019 baseline, excess core goods inflation was adding 0.6 percentage points to core PCE as of January 2026, per the Federal Reserve Bank of Minneapolis. If tariffs explained 0.5 points of that, the remaining 0.1 points represented inflation attributed to other factors.
What the Models Measure
Other inflation components had stabilized in ways that focused attention on goods inflation. Housing inflation returned to its pre-pandemic rate by January 2026, according to the Federal Reserve Bank of Minneapolis. Core services excluding housing remained largely stable since late 2024, the same analysis showed. Core goods inflation persisted while other categories stabilized.
Labor market shifts created pressure points that tariff models did not measure. Job growth declined by 156,000 positions per month between 2024 and the May through August 2025 period, per employment data. Assembly Bill 1228 imposed a $20-per-hour minimum wage on franchised fast food outlets in California in April 2024. These labor cost increases would flow through supply chains in ways that tariff accounting frameworks were not designed to measure.
The supply chain reorganization carried costs beyond tariff rates. The shift from India to Bangladesh in apparel production involved new supplier relationships, quality control systems, and logistics networks that required investment. Large tariffs were first introduced in spring 2025, according to the Federal Reserve Bank of Minneapolis, and the supply chain restructuring they triggered created ongoing adjustment costs.
Measurement and Economic Data
White House officials stated that foreign exporters, not American consumers, would bear the brunt of added tariff costs, per their public statements. Data showed tariff impacts at lower levels than predicted. The economic policy apparatus produced forecasts that differed from observed results. The frameworks designed to measure and predict inflation effects produced estimates that did not match observed reality.
Measurement systems showed limitations. Economists built models showing how tariffs should flow through to consumer prices and forecast percentage point impacts. When inflation appeared in categories with minimal tariff exposure while heavily tariffed categories remained stable, the models did not explain the pattern. The estimates produced by the frameworks differed from observed outcomes.
Federal Reserve frameworks produced results that differed from economic reality in multiple instances during the year. The pattern suggested that the tools used to manage a $27 trillion economy operated under certain conditions. Core goods inflation in 2026 followed patterns that the frameworks did not capture.
American consumers experienced 1.9 percent more expensive core goods, a change of 2.5 percentage points from pre-pandemic norms. Estimates suggested tariffs added between 0.5 to 1 percentage points to inflation. That left at least 0.9 percentage points attributed to other factors. The gap represented inflation driven by mechanisms that the frameworks were not designed to measure, affecting household expenses for groceries and furniture. Tariffs were identified as a primary explanation in policy discussions. Other inflation sources remained less clearly identified by the available frameworks.
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