January 1, 2026

In a recent letter to the editor at The Wall Street Journal, Scott Burns and I could have been clearer.

We wrote and rewrote and revised some more and eventually wrote ourselves into a bit of an ambiguity. Let’s blame the constraints of time and space (though of course we take full responsibility).

Here’s the entire letter (in italics), followed by our clarification:

Economists never claimed that tariffs immediately or inevitably cause inflation (“Why Everyone Got Trump’s Tariffs Wrong,” Page One, Dec. 16). We’ve long acknowledged that their effect on prices is complicated.

The first reason for that is the substitution effect: When tariffs raise the relative price of imports, consumers often shift their spending toward other goods. Some import prices may even fall, particularly if demand dries up. The net effect, then, is ambiguous.

The second factor is the income effect. Higher import costs give consumers less bang for their buck. If iPhone prices double because of tariffs, for instance, consumers enjoy less real income. Tighter budgets mean consumers have less to spend on other goods.

Moral of the story: If you’re looking solely at the inflation rate to see the effects of tariffs, you likely won’t find it. In a vacuum, the levies cause a one-time jump in an economy’s price level but not a continuous rise in its growth rate. What happens after that depends on how policymakers respond. In any case, tariffs’ most predictable and immediate effects are sputtering growth and declining consumer welfare.

Ask yourself: Doesn’t that resonate with your experience over the past nine months?

The part about the substitution effect is a bit muddy.

No doubt about it: The substitution effect cannot make a good’s own-price fall.

But as people substitute away from the higher price import in favor of the now relatively more attractive domestic goods, their real income falls. After all, the domestic good may be relatively more attractive, but its price isn’t as low as before the tariffs. With less income, consumers’ demands for all goods—including imports—may decrease and may decrease enough to outweigh the influence of the tariff. But that’s just the income effect—which our letter to the editor discusses. So, while it’s true that “some import prices may even fall” (as we said), we could have been clearer on the mechanism. The mechanism is the income effect, not the substitution effect.

We state: “Some import prices may even fall, particularly if demand dries up. The net effect, then, is ambiguous.” True. But those two sentences should come after the paragraph on the income effect—not before it.

A better letter would thus read:

Economists never claimed that tariffs immediately or inevitably cause inflation (“Why Everyone Got Trump’s Tariffs Wrong,” Page One, Dec. 16). We’ve long acknowledged that their effect on prices is complicated.

The first reason for that is the substitution effect: When tariffs raise the relative price of imports, consumers often shift their spending toward other goods.

The second factor is the income effect. Higher import costs give consumers less bang for their buck. If iPhone prices double because of tariffs, for instance, consumers enjoy less real income. Tighter budgets mean consumers have less to spend on other goods, including imports. Some import prices may even fall, particularly if demand dries up. The net effect, then, is ambiguous.

Moral of the story: If you’re looking solely at the inflation rate to see the effects of tariffs, you likely won’t find it. In a vacuum, the levies cause a one-time jump in an economy’s price level but not a continuous rise in its growth rate. What happens after that depends on how policymakers respond. In any case, tariffs’ most predictable and immediate effects are sputtering growth and declining consumer welfare.

Ask yourself: Doesn’t that resonate with your experience over the last nine months.