Do Tariffs Really Cause Inflation? Yes they Do!

Introduction

Do tariffs cause inflation? After the trump administration raised tariffs on over 80% of countries across the world, shockwaves went through U.S. capital markets, and policymakers in developing economies rallied to find solutions to absorb the shock of unilateral U.S. tariffs. African countries were subject to high tariffs that ranged from 50% for Lesotho to 18% for Zimbabwe. Angola, Libya, and South Africa were in the low 30’s. Even smaller countries like Cameroon, with negligible U.S. trade volumes, saw tariffs of about 15%, initially. Most economists were certain that inflation across the United States would increase, but others argued that the impact may be more ambiguous.

Figure 1: Initial Tariffs on Africa from President Trump

It is important to note that the initial tariffs imposed on most countries were later reduced significantly to 15% for most countries, like Botswana, Lesotho, Mauritius, and Madagascar. While I am well aware of the different interactions between currencies, capital flows, and post-tariff policy,  this article shows that tariffs unequivocally caused inflation o fall at a slower pace in 2025 when compared to 2023 and 2024. In recent months, inflation reached 3%, higher than in some months in 2024.

“In the U.S., prices for durable goods—such as vehicles, electronics, and furniture—have increased noticeably. These price movements align with the timing of tariff hikes earlier this year.”

Did Tariffs Cause Prices to Rise in the U.S.?

Well before President Trump came to office, prices were already well above the FED’s 2% target. During Biden’s second term, U.S. inflation averaged 5%, compared to 2.4% since the trump administration took office in 2025. Yes, inflation is falling from previously high levels, but it remains well above the Federal Reserve’s 2% target, and inflation fell at a much faster pace under Biden than under President Trump. With a strong economy, Trump argues that the FED’s reaction function should follow that of Sweden. However, Sweden’s central bank – the Riksbank – cut policy rates despite having high inflation because the economy was growing slowly and the central bank needed to cut policy rates to support consumer spending, as most consumers have variable-rate mortgages that make them susceptible to high inflation.  

Back to tariffs: Trump liberation day tariffs and the revised rates definitely caused the prices of some imported products to rise. At first, businesses were absorbing some of the cost with retained earnings from previous quarters. However, the expectation of a price increase and high import duties caused some firms to raise prices. Some U.S. firms like Walmart and Amazon informed consumers of upcoming price increases, much to the displeasure of President Trump. As illustrated in Figure 2 below, U.S. inflation has stayed well above 2% since the President imposed unilateral tariffs and despite the best efforts by some importers to bear the brunt of higher import duties.

Figure 2: Average inflation during Biden Vs. Trump presidency

Source: FRED St. Louis

If we compare inflation during Biden’s term and President Trump’s term, it is clear that inflation is higher than it would be without tariffs. While it is true that inflation was falling, tariffs caused inflation to fall at a slower pace. During Biden’s term, which was 2021 – Jan 2025, inflation averaged 4.95% and prices fell in 2023 and 2024 by 49% and 27%. If you take an average of price increases and dips throughout the Biden presidency, prices rose by 71% on average.

What does the academic literature say?

There is a wealth of academic literature from the Federal Reserve Bank, Bank of International Settlements, IMF, and World Bank, which all say tariffs increase the price of goods and services. There was no reason for academics and central bankers to obfuscate the impact of tariffs. Even though some U.S. firms absorbed the cost of higher import duties, prices nonetheless increased for goods and services. In fact, Christopher. J. Waller from the Bank of International Settlements found that even after absorbing some of the cost of import duties, U.S. inflation was likely to average about 3% even as inflation averaged 2.5% in the first 11 months of 2025. However, with the October figure missing due to the government shutdown, it is Lilley that inflation was closer to 2.6 – 2.7% in 2025. So yes, higher tariffs cause prices to rise. This is because the inputs for businesses become expensive, and they end up transferring such price increases to consumers.

Figure 3: A Weaker U.S. dollar Caused inflation to Soar in 2025

Source: FRED St Louis, FRED St Louis

What Role did a Weak Dollar Play in Boosting Inflationary Pressures?

After the stock market meltdown caused by the liberation day tariffs, the dollar tumbled. Most currencies across the world appreciated against the dollar, making imports a bit more expensive in addition to tariffs. It is important to note that U.S.–China and U.S.–EU trade tensions have not caused two-way trade to fall between both countries. U.S. consumers continued to import, and the weaker dollar put pressure on domestic prices, even as some importers like Walmart and Amazon tried to limit higher prices by absorbing some of the cost of tariffs.

Figures Three and Four show that the dollar depreciated the most between March – September 2025, when prices were rising progressively to reach 3% in November. Of course, correlation is not causation, but there are plenty of studies that show the value of the U.S. dollar has an impact on import prices. The passthrough from the currency to the import channel is well alive, especially as over 45% of global goods and services are invoiced in the U.S. dollar. Higher tariffs, coupled with a weak dollar, kept prices high for consumers.

Figure 4: Dollar Nominal Index Weaker, then Stronger in Q4 2025

Are Tariffs a Useful tool in economic policy?

President Trump has shown that tariffs cause inflation to rise, or, in the best-case scenario, tariffs cause prices that were previously high to fall at a slower pace. Prices were already falling when President Biden left office, but they have since risen in recent months, despite falling by 20% when you compare prices in the first ten months of 2025 to those of 2024. An improvement, yes, but prices would have been significantly lower if there were no tariffs and the dollar were stronger.

Conclusion: What’s the Verdict?

U.S. tariffs have increased prices for consumers. Inflation remains well above the Federal Reserve’s 2% target, and prices in recent months rose by 3%y/y. Prices rose less than some analysts expected because President Trump lowered the import duties that were initially imposed on countries across the world. So yes, tariffs are inflationary even when businesses try to absorb them to keep prices low. One can count the U.S. lucky for having an economy that continued to perform well in spite of too-high import duties. While I will concede that most countries had very low tariffs, the U.S. financial system benefited from being the lender of last resort.

Of course, trade, finance, and invoicing will shift away from the United States, and it will be the undoing of the dollar. The canary in the gold mine has largely settled, but the world is adapting to a less supportive U.S. and a new multipolar world driven by the dollar, Euro, and other currencies.

Henri Kouam is an economist and Executive Director of the Cameroon Economic Policy Institute (CEPI), one of the leading thinktanks in Cameroon. He is a trade expert with over 8 years of direct policy and implementation experience across Central and West Africa. He has previously consulted for the Bill and Melinda Gates Foundation, NATO and currently works as a consultant for the Economist Intelligence Unit (EIU).