A basic, but common, misunderstanding about inflation and rates has caused Congress to rely almost solely on monetary policy to steer the economy. However, its perception may be not only wrong but possibly reversed from our economic reality.

Both tariffs and a higher cost of money produce the same net effect on prices. Business has little choice except to pass along increases to consumers in a competitive market. While this places some dampening on productive economic activity it also places pressure on employers to raise wages. The equilibrium that will result from either will be higher consumer prices “AND” less employment. However, the increased “dollars” involved will reflect in higher GDP reports. Increased dollars without increased productive activity is the definition of inflation.