When the U.S. Bureau of Labor Statistics reported that its most recent measure of consumer price inflation was just 2.7%, it came as a surprise to many. The consensus prediction on Wall Street had been 3.1%. Ever since President Donald Trump announced his Liberation Day tariffs last April, economists have been expecting the extra cost of those tariffs to show up in the inflation numbers. After all, the effective tariff rate on goods imported from China was as high as 57.6% in November 2025, according to the Peterson Institute for International Economics. Surely this would force up the price of goods for consumers? Nope, according to two new studies. Historically, tariffs haven’t resulted in big bursts of inflation, the studies from the Federal Reserve Bank of San Francisco and Northwestern University show. That’s because importing companies tend to find ways around the tariffs, or because countries negotiate enough compromises and exemptions to the tariffs to reduce the headline rate.
Both studies showed tariffs hurt economic growth and increase unemployment. But in terms of inflation, they were more benign than expected.
In fact, U.S. government revenue from Trump’s tariffs is already in decline, according to a research note from Pantheon Macroeconomics on Tuesday. That suggests their effect on inflation will get weaker as time goes by. Tariff revenues peaked at $34.2 billion in October and then declined to $32.9 billion in November and $30.2 billion in December, Pantheon’s data shows.
“The latest trade data still are only for September, but sensible projections for recent months suggest the average effective tariff rate is about 12%, still well below the levels estimated by independent fiscal watchdogs,” analysts Samuel Tombs and Oliver Allen told their clients.
They estimate that the effect on “Personal Consumption Expenditures” (PCE) inflation will only be about 0.9 percentage points, of which companies will eat 0.3. “Our calculations suggest 0.4pp of this uplift had filtered through by September, so the tariff hit is now mostly behind us. Core PCE inflation, therefore, likely will be within touching distance of the 2% target later this year.”
Good for inflation, bad for debt
The paucity of tariff revenue has knock-on effects for the U.S. government’s ability to tackle its debt. As the Pantheon note says, “Revenues also are tracking well below the White House’s expectations; Treasury Secretary Bessent predicted in August that tariffs will raise ‘…well over half a trillion, maybe towards a trillion-dollar number.’”
Independent research shows the tariffs have thus far come in far below that level. The Bipartisan Policy Center estimates that tariffs raised $288 billion in 2025. Politico puts it at $261 billion. The St. Louis Fed tracker shows $331 billion was collected from all production, imports, and customs taxes in Q3 2025, and that growth in those collections was slowing from the previous period.
The government’s cumulative deficit for the fiscal year 2026 (which began in October) is already $439 billion, according to the Bipartisan Policy Centre. The total national debt currently exceeds $38.5 trillion.
Trump has already spent part of the tariff revenue on a $1,776 “warrior dividend” for 1.45 million U.S. military personnel, prior to the Christmas holidays.
The decline in revenue also has implications for the $1,000 “Trump accounts” that the president wants to give children and the undelivered suggestion that he might also give every citizen a $2,000 bonus from the tariffs.
Treasury yields—which measure the premium investors demand for running the risk of lending money to the U.S. government—have ticked up in the last three months. The yield on the 5-year Treasury rose from a low of 3.55% to 3.727% today. The yield on the 10-year rose from a low of 3.95% to 4.187% today. Those increases imply marginally increasing scepticism among investors about the ability of the government to fund its debts.
Stock investors, however, appear to be very happy about the lack of inflation and the apparent lower risk of future inflation. The S&P 500 closed up 0.64% yesterday, within less than 1% of its all-time high. Futures were flat this morning. Europe and Asia traded up this morning and Bitcoin appears to be holding its own at above $93K.
Here’s a snapshot of the markets ahead of the opening bell in New York this morning:
- S&P 500 futures were up flat this morning. The last session closed up 0.64%.
- STOXX Europe 600 was flat in early trading.
- The U.K.’s FTSE 100 was up 0.59% in early trading.
- Japan’s Nikkei 225 was up 1.32%.
- China’s CSI 300 was up 1.55%.
- The South Korea KOSPI was up 1.52%.
- India’s NIFTY 50 was down 0.28%
- Bitcoin rose to $93.5K.
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