Key Takeaways
- President Donald Trump’s proposed campaign of tariffs could push up wages by raising inflation expectations, according to a new analysis.
- In one scenario modeled by Deutsche Bank, wages could rise 4.5% a year, well over the 3% common before the pandemic.
- Higher wages and inflation expectations could be an alarming combo for officials at the Federal Reserve, who have worried about “wage-price spirals” setting off 1970s-like inflation feedback loops.
Tariffs could make all kinds of things more expensive, and that includes an hour of your labor, according to an analysis from economists at Deutsche Bank.
Economists are usually quick to highlight the possible downsides of tariffs: trade barriers tend to drive up prices for things and leave countries worse off than if they traded freely, or so goes the conventional wisdom. Accordingly, financial markets have swooned in response to Trump’s recent on-again, off-again tariff announcements, and the looming April 2 deadline for even more, broader tariffs to be imposed.
But if tariffs raise consumer prices, the economic pain could come with a silver lining for households: bigger paychecks.
Economists at Deutsche Bank examined the tariff campaign in light of 2022 research from the Federal Reserve Bank of San Francisco that showed how wages are often tied to consumers’ expectations of inflation. They found that when people anticipate inflation will be higher, they demand, and get higher wages. Recent consumer surveys have shown people’s inflation expectations have indeed jumped in recent weeks amid the tariff threats.
Matthew Luzzetti, chief economist at Deutsche Bank, and his colleagues, estimated the latest round of tariffs could push wage growth to as high as 4.5% a year, far above pre-pandemic levels of around 3%.
They dynamic could be similar to the labor market during the recovery from the pandemic, when wages rose rapidly alongside a inflation that surged to its highest in four decades.
What Could That Mean For the Fed?
That could have implications for the Federal Reserve, which sets the nation’s monetary policy with the goal of keeping inflation low and employment high. Officials at the Fed have been closely watching the tariff drama to see if it will stoke inflation by pushing up consumer prices.
After the pandemic, officials at the Federal Reserve responded by rapidly hiking the central bank’s fed funds rate, pushing up borrowing costs on all kinds of loans, in an effort to head off a “wage-price spiral” of paychecks and price tags pushing one another higher, similar to the economy in the 1970s.
But some officials have said they might be hesitant to react to an uptick consumer prices if it was a one-time jump from the imposition of tariffs: by definition, inflation is a trend of prices rising quickly for a long time. However, if the Deutsche Bank model is accurate, higher wages from the tariffs could reignite inflation’s fires, demanding a quicker response from the Fed.
“These results suggest the Fed should not ignore short-run inflation expectations as they assess how to respond to this trade war,” Lutezzi wrote in a commentary.
