Tariffs and inflation: how import duties feed into consumer prices

Not always, but frequently. WTO rules permit retaliatory tariffs that are proportionate to the original measure — and most major US trading partners have used this route. The EU retaliated to 2018 steel tariffs within weeks. China retaliated extensively to the 2018–19 tariff rounds. Retaliation adds an additional inflationary channel in the retaliating country while also reducing exports. The net global effect is stagflationary. Supply shocks from tariffs work through exactly this mechanism.

Cutting rates in response to tariff-induced inflation would risk fuelling demand-pull inflation and unanchoring expectations. The correct central bank response to a one-off tariff price shock is to look through it — hold rates steady and wait for the base effect to unwind. Only if the tariff shock triggers sustained wage increases or materially raises medium-term inflation expectations would tightening be warranted.

Yes. In a full-employment economy, workers have more bargaining power — they can demand higher wages to offset higher prices. This is the second-round channel that turns a one-off price shock into a persistent inflation problem. In 2025–26 advanced economies, labour markets are still tight by historical standards (US unemployment at 4.1%, UK at 4.3%), which means the second-round risk from tariffs is higher than it would have been in, say, 2015.