As inflation continues to strain household budgets, voters remain deeply concerned about rising costs. Yet, according to UBS Chief Economist Paul Donovan, inflation fears are unlikely to deter the United States from maintaining or even increasing tariffs under its protectionist trade policies.

Despite the economic burden tariffs impose on consumers, the immediate political and economic context appears to favor their persistence, particularly under leadership with a protectionist agenda. Donovan’s analysis sheds light on the disconnect between inflation pressures and tariff-related trade decisions.

Tariffs’ Hidden Inflationary Impact

Tariffs inherently add costs to imported goods, often passed down to consumers through higher prices. A 20% tariff, for example, may lead to an 8% increase in a product's retail price. While these figures indicate higher costs, Donovan explains that the true inflationary impact of tariffs is often muted due to their application at the point of import rather than directly at the checkout counter.

Once goods enter the supply chain, profit margins and distribution costs often absorb part of the tariff's impact, softening the blow for consumers. However, while this lessens the perceived burden, it also hides the broader inflationary consequences from public scrutiny.

Inflation Perceptions: Why Tariffs Fly Under the Radar

Inflation perceptions, Donovan argues, are disproportionately shaped by the prices of frequently purchased goods such as food and gasoline. These essentials are often produced domestically, making them less directly affected by tariffs. Conversely, tariffs tend to increase prices on less frequently purchased items, such as durable goods, which do not significantly influence voters' inflationary anxieties.

This disconnect between actual tariff impacts and inflation perceptions creates a political buffer for policymakers, enabling them to impose or maintain tariffs with relatively little public backlash. Donovan notes that while tariffs contribute to inflation in the aggregate, their subtle effects on consumer behavior shield them from becoming a flashpoint in inflation debates.

Political Agendas Over Economic Logic

The persistence of tariffs, Donovan concludes, is ultimately rooted in political motivations rather than economic pragmatism. Protectionist policies often play well with voters who perceive them as safeguarding domestic jobs and industries, even if the broader economic costs are substantial. Leaders focused on advancing a protectionist agenda may prioritize political gains over concerns about inflationary pressures.

“Policymakers appear to be leveraging the muted consumer response to tariff-related price increases,” Donovan notes. This dynamic suggests that inflation fears alone are unlikely to sway trade decisions in the near term.

Future Outlook: Tariffs Likely Here to Stay

As protectionist policies remain politically advantageous, economists like Donovan see little evidence that inflation will prompt a rollback of tariffs. Instead, the structural nuances of tariff impacts on consumer prices and inflation perceptions will likely allow these trade measures to persist, even as inflation remains a pressing concern.