Powell, Tariffs, and Affordability Angst

Some thoughts on this week's press conference

Listening to Jerome Powell’s latest press conference, I got an uneasy sense of déjà vu. The discourse around inflation is starting to sound depressingly similar to the Covid period: lots of emphasis on supply shocks, lots of caution about overreacting to one-off price rises, and too little focus on the deeper nominal forces that can turn isolated price pressures into generalized inflation.

Indeed, a failure to elucidate clearly what went wrong after 2020 makes us likely to misread the risks today.

Affordability angst is mainly about the price level (“everything is more expensive”), not headline inflation

Let’s start with what Powell got right. He was unusually candid about the public mood:

People — there were big price increases… Everywhere real wages have been going up for three years, roughly. People are not feeling good about it yet… When you talk to people, they do feel squeezed.

That is exactly right. By conventional metrics, real wages have been rising for some time, including through 2025. But that does not mean households feel economically secure. What voters remember is not just the recent growth rate of prices. It is that the level of prices for rent, groceries, energy, and other essentials jumped sharply and has never gone back.

That distinction matters. Economists often think of affordability in relative terms—prices versus wages. Households seem to be experiencing it more viscerally: everything costs more than it used to. Even if real earnings have grown, the shock of a permanently higher price level after a long period of price stability has lingered. That sticker shock is one reason inflation is so politically toxic and why the public remains receptive to so many bad “affordability” ideas.

And this is exactly why getting the history right matters. If today’s politics are still being driven by the legacy of the Covid-19 inflation, then we need to be clear about what caused that inflation in the first place.

Powell still talks about recent inflation through the prism of “supply shocks”

Yet when Powell turns from the politics of inflation to its causes, the old framing returns:

We did go through a long period where the shocks were all demand shocks… We had a lot of practice in thinking about supply shocks in the last four or five years.

This still gives too much weight to the idea that post-pandemic inflation was primarily a sequence of unfortunate supply disturbances—Covid-19 disruptions, energy spikes, food shocks, tariffs. Those things mattered. They affected relative prices and temporarily reduced productive capacity. As such, they exacerbated inflation at various times. They also played a bigger role in other countries, such as the UK. But they do not explain why inflation became so broad-based and so persistent in the US.

That is the lesson policymakers have still not fully absorbed. The central fact of the period is that nominal spending surged, far beyond both the economy’s ability to produce goods and services and far above its pre-pandemic trend too.

That happened in an environment of both aggressive monetary accommodation and huge fiscal expansion. It was policy-determined. However one wants to apportion the blame between Treasury and the Fed, an inflation-targeting central bank is ultimately responsible for keeping aggregate nominal spending consistent with its inflation target. The Fed failed to do that.

That is why inflation spread well beyond a handful of disrupted sectors. It is why it did not fade quickly once bottlenecks eased. And it is why today’s arguments feel so familiar. We are once again treating inflationary pressures as sector-specific, driven by shocks, and temporary. But that was the comforting story last time too.

Powell is broadly right on tariffs

That’s not to say there’s no truth in Powell’s words about supply-shocks. His most striking comment concerned trade policy:

“If you look at total core inflation, it’s about 3%. Some big chunk, between half and three quarters, is tariffs.”

Taken in standard central-bank language, that means tariffs are contributing roughly 0.5 to 0.75 percentage points to core inflation. That is a large claim. But directionally, it is entirely plausible.

Tariffs raise costs for domestic firms that use imported inputs. And by shifting resources toward less efficient protected sectors, they weaken productivity and reduce the economy’s overall productive potential. For any given path of nominal spending, that means a higher price level jump than otherwise. So we mainly see a one-off inflation burst.

So Powell is right that Trump’s tariffs are worsening the inflation picture on the margin, all else given. But here too the resemblance to the Covid-19 discourse is hard to miss. Then, inflation was persistently blamed on transitory difficulties: semiconductors, shipping bottlenecks, energy prices, and supply snarls. Now tariffs are playing the role of the latest prominent cost shock. And yes, they matter. But the key question remains the same as it was then: are these relative-price and supply-side pressures that would cause one-off jumps in the price level being accommodated by nominal demand growth that is too strong?

That is why the messenger is so striking. The Fed chair who presided over the highest inflation since the early 1980s is now pointing the finger at tariffs for keeping inflation above target. He is not necessarily wrong. But given nominal spending growth has only very recently fallen to levels that might plausibly be consistent with 2 percent inflation, one is tempted to say: physician, heal thyself.

On oil, Powell’s caution is sound—but this is exactly how the last debate began

Powell was more careful on the inflationary effects of the Iran war:

The implications of developments in the Middle East for the U.S. economy are uncertain… higher energy prices will push up overall inflation… it is too soon to know the scope and duration.

Nobody knows… you look through energy shocks… but that depends on expectations remaining anchored.

In narrow analytical terms, that is sensible. A central bank—recognizing it only has tools to affect nominal spending at its disposal—should not mechanically tighten in response to every one-off energy shock. Oil-price spikes are mainly adverse supply shocks: they raise prices while squeezing real output. Tightening aggressively against them can compound the output damage.

In reality, the situation for a net exporter like the U.S. is a bit more complex, because of the higher income. But even on the supply-shock aspect, the shock can become a bigger problem if it feeds into broader inflation expectations.

This is precisely where the Fed’s analysis of the recent past undermines its credibility. Last time, policymakers also stressed uncertainty. They also emphasized temporary and sector-specific shocks. They also implied that patience, rather than tighter policy, was the appropriate response. And all the while, nominal demand kept running too hot.

So even if Powell is analytically right to be cautious today, the risk is that this sounds like a replay of the old script. That is a credibility problem of the Fed’s own making.

The risk is not just higher oil or tariffs. It is relearning the wrong lesson.

Might we soon be replaying the post-pandemic inflation debate of the role of demand vs. supply drivers all over again?

Some monetarists, such as Tim Congdon (who called the last inflation early), are already pointing out that the Fed’s bank deposits data—a key component of broad money—has been growing strongly again in recent months. Nominal wage growth also remains above the level historically obviously consistent with a 2 percent inflation target.

That alone does not prove a fresh inflation surge is inevitable. But it does mean the question should not simply be whether tariffs or oil are one-off supply shocks. The more important question, as during Covid-19, is whether monetary conditions allow those shocks to become embedded in a broader, more persistent inflation.

That is the full circle. Powell now seems to understand why Americans still feel squeezed. But unless the Fed fully internalizes what went wrong during the Covid-19 inflation—namely, that excessive nominal demand turned specific shocks into generalized inflation—the Fed’s analysis will keep sounding complacent, given what happened last time.