On one of my trips to Nicaragua, I stayed in a motel on the Pacific Ocean. Early in the morning, I noticed several small fishing boats coming in and went to the beach to meet them. I watched them start selling their fish to villagers, who would buy fish by the basketful and then bicycle it to neighboring villages to sell on the street. I was amused by the whole business model and noted that there were no taxes or invoices exchanged — just fish for cash.

Inflation and tariffs have continued to be on everyone’s minds and were a hot topic during the election. A report last week showed that inflation in October rose 0.2% from September, continuing the same steady monthly pace as July, August and September. This means prices continue to increase slowly, much to consumers’ frustration.

Though inflation continues to be stickier than the Federal Reserve officials anticipated, they are expected to lower their rate again in December. Still, the Fed could pause their rate cuts in January as strong consumer spending and stronger-than-expected economic growth continue to push prices up.

How will tariffs affect inflation?

Investors are concerned that potential Trump tariffs could make inflation worse. A tariff is simply a tax on goods imported from other countries. The question is, who ends up paying the tax? The company that imports the product either passes the tax on to the customer as a price increase or pays it themselves, which reduces its profits.

Reviewing the effects of Trump’s 2018 tariffs, it seems that not all price increases are passed on to consumers. For example, a National Bureau of Economic Research white paper stated that in 2018, only “half the cost of the steel tariffs” were passed on to customers.

Of course, the new administration could exclude some products from the tariffs. The first Trump administration granted exclusions for more than 2,200 products after businesses applied for exemption because the tariff would do significant harm or that product was not available in the U.S. Ironically, Biden kept most of Trump’s tariffs and put additional tariffs in place in May of this year.

What happened to inflation in 2018–2019?

After reviewing the Producer Price Index and the average wholesale price between 2013 and 2024, I noticed that tariffs imposed in 2018 hurt companies more than consumers. This is because the wholesalers didn’t fully pass on the additional cost of importing. That doesn’t mean companies will decide to swallow the increased expense instead of raising their prices this time, but it could be a pattern.

Taxes, whether from tariffs or policy decisions, usually slow down the economy. Businesses and consumers feel the impact, employment typically shrinks and the impacted foreign countries often retaliate with tariffs on U.S. goods as a tit for tat. Tariffs also can have positive effects, such as creating negotiating opportunities and forcing companies to produce those goods in the U.S. instead of other countries, providing jobs in America.

Investors are right to move into 2025 with caution because of economic headwinds. The market is becoming overvalued, the effects of tariffs are unknown and stubborn inflation has continued. So far, the market has remained strong thanks to consumers who continue to spend at high levels, a season of Fed rate cuts and many businesses ramping up spending.

Thinking back to that day in Nicaragua, I realize that a modern society needs taxes for roads, police and other things. But as I started helping some of the fishermen push their boats ashore, I couldn’t help but wonder just how nice it would be to live in a tax-free world.

Have a blessed week.

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