According to Forbes, Harvard Business School’s Pricing Lab research using daily retail price data shows tariffs are adding about 0.7 percentage points to inflation. Their analysis of August 2025 CPI data found inflation would have been 2.2% instead of 2.9% without tariffs. The pass-through to consumers currently averages only 20% of tariff costs, but researchers expect that to reach 100% over several years. When converted to the Fed’s preferred PCE index, this suggests underlying inflation is already at their 2% target. Fed Chair Powell has previously referenced analysis supporting “seeing through” tariff-induced inflation when setting policy.
The Fed’s impossible choice
Here’s the thing about tariffs – they create a policy nightmare for central bankers. Regular inflation comes from too much money chasing too few goods, something the Fed can fix by raising rates. But tariffs? They’re just taxes on imports that make stuff more expensive regardless of economic conditions.
The Fed’s own research from 2018 basically says the smart move is to ignore tariff-driven price hikes when setting interest rates. Why crush the economy to fight inflation you didn’t cause? But there’s a catch – if consumers and businesses start believing higher prices are permanent, inflation expectations could become unanchored. And that’s when you get real, persistent inflation that’s much harder to kill.
Why tariffs hit slowly
This is where it gets really interesting. The research suggests tariff pass-through happens gradually over years, not all at once. Think about it from a manufacturer’s perspective – when tariffs first hit, you might eat the cost because you’ve already made the products and bought materials. But when you need to replace equipment or reorder supplies? That’s when prices really jump.
So we’re looking at this slow-motion price increase that could make people think inflation is permanently higher. That creates a perception problem for the Fed. Do they treat each price hike as temporary, or assume it’s the new normal?
What this means for your wallet
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My take? The Fed will probably split the difference. They’ll cut rates some, but not as much as the doves want. We might see a quarter point here and there, but don’t expect a rapid return to zero interest rates. The uncertainty around tariffs means they’ll keep some powder dry, just in case.
Basically, we’re stuck in this weird middle ground where the economy looks healthy on paper but feels fragile in reality. And that’s exactly when central banking gets really, really hard.
