Will A Trade War Cause Soaring Inflation?

By Gary Alexander

Old economic theories and partisan political critics say that President Trump’s escalated tariffs will cause soaring inflation going into next year’s elections, perhaps causing a recession and hurting his re-election chances. If so, raising tariffs on $300 billion in Chinese goods has to be the most dunderheaded political move in recent history – right behind Bush 41’s raising taxes after saying, “Read my lips – no new taxes.”

Bad news always sells best, so we’re seeing headlines like this one from Bloomberg last week: “Goldman Says Trade-War Escalation to Drive U.S. Inflation Higher.” Their article summarizes Goldman’s forecast:

“Trump’s latest tariff increase on Chinese goods will drive up the Federal Reserve’s preferred measure of underlying inflation, and a further escalation of the trade war will have an even greater impact on prices as well as economic growth, according to Goldman Sachs Group Inc. Goldman revised up its estimate of the tariff impact on core personal consumption expenditures inflation to 0.2 percentage point, according to a note Saturday. The firm estimates if the U.S. imposes tariffs on the roughly $300 billion remaining in Chinese goods, the effect would increase to 0.5 points.”

Further escalation of the trade war, they said, “could result in a hit to GDP as large as 0.4%, and if trade tensions sparked a major sell-off in the equity market, the growth impact could worsen considerably.'”

Such scary scenarios ignore the fact that we’ve operated under Trump’s tariffs for over a year now with minimal impact on most inflation measures. It’s now over a year since the Trump administration applied its first tariffs on steel and aluminum imports, and so far, the much-feared economic costs have yet to be seen. In most cases, there have been few or no increase in prices of goods containing tariffed products.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Predictions of inflation, slower growth and recession due to high tariffs are two years old, yet we’ve seen 3% growth and 2% inflation so far – except in China, where our tariffs are slowing Chinese growth and fueling inflation there, particularly in pork prices, partly due to swine flu in their Year of the Pig.

With a strong dollar, a devalued yuan and some cost absorption by middlemen, prices have been stable. The main upward pressure on inflation lately has come from energy (of which, the U.S. is self-sufficient), housing and health care, which are domestic industries. Inflation has not been mainly import-generated.

One major difference in today’s world versus a century ago or in the Cold War era is that global capital is mobile. When “Made in Japan” became too expensive, factories moved to Taiwan or South Korea. When those Asian Tigers charged too much, factories moved to China. If China can’t compete due to tariffs, the owners of those Chinese factories can move to Thailand, Vietnam or elsewhere. Capital is mobile. A recent survey by the American Chamber of Commerce in South China found that over 70% of U.S. firms operating in Asia are considering delaying more investment in China or relocating production elsewhere.

The CPI Overstates Inflation, Perhaps by 2% a Year

Writing in The Wall Street Journal‘s “Inside View” last week, Andy Kessler says he is “convinced that all of the common measures overshoot by at least 2 percentage points, and maybe even 5 or more. That’s because of the flaw in the Bureau of Labor Statistics’ hedonic adjustment, which totally misses the way the cost of technology declines over time.” Even Alan Greenspan, that nonagenarian technophobe, said in a Wharton interview last month, “We have a problem with measuring inflation… because products are continually changing.” He baldly said, “You’re getting statistics which are not correct,” adding that, “the 2% inflation rate as currently measured is the equivalent of zero for actually what consumers are buying.”

This is especially true for electronics, whose prices tend to continually fall. We know that simple-function calculators once cost thousands of dollars, while multi-function calculators now cost less than $10. It’s the same with smartphones versus the old mobile brick phones. Technology also increases our productivity and makes life easier. You don’t drive to a library to hunt through stacks of books. You just “ask Alexa.”

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If you go back to 1989 and try to argue that life was better then – with the Berlin Wall intact, fuzzy TV pictures, 2400 bps modems, brick-sized cell phones, fax machines and zero Internet – you are welcome to your delusions, but if you use Greenspan’s math and subtract 2% inflation per year, 2019’s inflation-adjusted GDP would be about $26 trillion, not the $20 trillion currently reported. That would be $82,000 per capita and a 30% increase in “real” wages that you thought were flat. That means there was no slump in productivity or middle-class stagnation, and our debt-to-GDP ratio is more like 77% rather than 100%.

It pays to view the received wisdom of our sacred numerology with a generous dose of salty skepticism.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

Disclaimer: Please click here for important disclosures located in the “About” section of the Navellier & Associates profile that accompany this article.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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