Inflation Isn’t Over, and Tariffs Aren’t the Main Culprit

Focusing on tariffs as the cause of inflation misses a more systemic issue

The latest inflation data should put to rest any notion that the United States has returned to pre-pandemic price stability. Headline numbers may look tame at first glance, but the underlying trend is troubling once you strip away temporary quirks in rent measurement and price declines in categories like airfare and hotels. Core services—from restaurant meals to dental visits to personal care—continue to rise at a faster pace than before 2020. Even manufactured goods which briefly offered some relief, have seen prices tick back up.

This, however, is not a story of tariffs alone. The inflationary pulse is broad-based and deeply embedded. It’s a fiscal story.

It is tempting to pin today’s price pressures on the new round of tariffs. After all, import taxes raise costs, and history shows they feed into consumer prices. But the data makes it clear that this explanation is far too narrow. Inflation is accelerating even in areas untouched by trade policy. The stickiness of service-sector prices, combined with the lagged way housing costs show up in the Consumer Price Index, demonstrates that inflationary momentum runs comes from more than just tariff pass-throughs. Tariffs add fuel, but they are not the spark.

The more fundamental driver is fiscal policy, and more crucially, the consolidated government budget constraint. As my colleague David Beckworth explains it in this excellent post, at the end of the day “Uncle Sam ultimately has to cover his real obligations. There is no free lunch.” The requirement for the government to pay off its debts must hold one way or another whether through higher taxes, lower spending, more borrowing, or through the inflation tax. This is why today’s inflationary pressures are not just about tariffs, energy prices, or Fed missteps. They are about fiscal pressure and the fiscal dominance they result in.

Fiscal dominance occurs when the government’s financing needs constrain the Federal Reserve’s ability to control inflation. Another way to think about it – fiscal dominance is a situation where the Federal Reserve is tasked with keeping the growth of the debt under control—a role usually reserved to the fiscal authorities.

Keep in mind that our public debt to GDP ratio is now over 100 percent and heading to 120 percent in ten years. Although the administration has signaled their desire to restrain spending with DOGE, a rescission package, and tax cuts aimed at reigning in programs like Medicaid, Washington is still flooded with red ink. As Jack Salmon showed recently, Washington only looked restrained in the first half of 2025 because the Treasury was forced into “extraordinary measures” because Congress was unable to raise the debt ceiling. That artificial brake was released on July 4, when President Trump signed the One Big Beautiful Bill Act, lifting the debt ceiling by $5 trillion. The results were immediate. In July alone, federal outlays jumped by $56 billion compared to the year before for a total spending that month of $630 billion. The deficit approached $300 billion for the month, Salmon notes. Year-to-date, red ink has already topped $1.6 trillion, putting the country on track for a $2 trillion annual deficit.

That, of course, is potentially only the tip of the debt iceberg. Legislators seem keen to solve the upcoming insolvency of Social Security and Medicare by maintaining the benefits as they are and paying for it all with borrowing. Doing so would mean an increase of the debt of $116 trillion over 30 years.

Understanding this reality helps us to better grasp what is behind the pressure the Trump administration is putting on Fed chair Jerome Powell. Many observers see President Trump’s performative demands for rate cuts as political bullying of Mr. Powell. But that view misses the fiscal forest for the Trump trees. Beckworth notes that “what we are witnessing is less about Trump himself and more about the growing and unavoidable fiscal demands being placed on the Fed.” He rightfully points out that cyclical concerns about growth do not drive Trump’s calls for easier money today, as they did in 2019. These calls today are instead driven by mounting fiscal pressures.

It is essential to note that as flamboyant as Trump makes the fight with Powell, the trajectory of the fight between the Fed and the administration was set in motion years ago, with rising entitlement costs and debt service. Trump has added fuel with the One Big Beautiful Bill, but the underlying imbalance would be there regardless of who occupies the White House.

This means the pressure on the Fed is systemic and is bound to continue no matter who ends up in the White House or as Fed Chair. When budget deficits run nearly $2 trillion a year and debt continues to grow at an exponential rate, higher interest rates become fiscally painful. That isn’t even to mention that most of our debt has a very short maturity. The temptation to lean on the Fed, and to tolerate higher inflation, to keep rates lower than they otherwise would be, is not going away.

And this is the most important point, a point Beckworth makes in his post: while many people are concerned about the Fed's political independence, they are overlooking the most significant risk we face. What is at risk is not just the Fed’s political independence but its practical ability to deliver on its mandate without being subordinated to the Treasury’s financing needs.

Inflation today is a symptom of an economy straining under chronic fiscal excess. The Fed can raise rates, and tariffs will indeed make imports costlier, but as long as budget deficits continue to balloon and fiscal dominance looms, stabilizing prices will be extraordinarily difficult. Without genuine fiscal discipline – meaning slowing spending growth and tackling the chief drivers of these deficits – no amount of monetary maneuvering will restore durable price stability. (Oh, and by the way, expect more and more talk about the need to lift the inflation target to 3 percent or 4 percent.)

The uncomfortable truth is that inflation remains a real problem, and tariffs are only a very small reason why. The bigger challenge is Washington’s refusal to align what it spends with the revenue that it raises. Until that changes, Americans should expect inflationary pressures to remain a persistent feature of economic life.