Detecting Tariff Effects on Consumer Prices in Real Time

Excerpt:  “Economic researchers and forecasters face the difficult task of differentiating the effects of tariffs on consumer prices from the effects of other factors—such as inflation expectations, supply chain disruptions, labor market tightness, and energy prices—which may influence prices independently. The methods available for this task in the economics literature, however, are not suitable for assessing tariffs’ effects on consumer prices in real time. Most studies in the literature analyze effects on goods prices at the port of entry (import prices) and, in some cases, on domestic producer prices. The few studies that assess tariff effects on consumer prices typically focus on a subset of consumer goods or rely on data that are not publicly available in real time. In this note, we propose a methodology to detect tariffs’ effects on personal consumption expenditure (PCE) prices in real time. We first construct theoretical predictions of tariffs’ effects on individual PCE categories based on implemented tariff changes, the prevalence of imports in each category, and specific assumptions about pass-through from tariffs to consumer prices. We then assess whether our predicted tariff effects are able to explain observed changes in incoming PCE prices.” (footnotes omitted)