What inflation data really says about tariffs

Throughout the early 2020s, tariffs were widely blamed for rising costs. Pundits pointed to the Trump-era trade wars and Biden's strategic tariffs on Chinese goods as inflation accelerants, arguing that consumers would feel the pain in the checkout aisle. But as inflation patterns evolve in 2024 and 2025, the data tells a more nuanced story.

The steepest price increases haven’t occurred in tariffed goods like electronics, toys, or tools. Instead, inflation is most persistent in sectors untouched by trade policy—services like housing, insurance, healthcare, and childcare. Meanwhile, prices for many imported goods have stabilized or even declined, suggesting that global trade restrictions may have less direct consumer impact than feared.

The result is a quiet but consequential revision of how we understand tariff effects—not as blanket inflationary triggers, but as catalysts for supply chain adaptation and economic restructuring. This has deep implications for how businesses hedge geopolitical risk and how governments approach trade strategy without overheating domestic prices.

The textbook logic around tariffs is simple: they act as a tax on imports, raising costs for producers and consumers alike. A 25% duty on electronics from China should, in theory, push up shelf prices and squeeze household budgets. But the 2024–2025 inflation data reveals something surprising: many tariffed goods haven’t followed this script.

Take consumer electronics, apparel, and toys. Despite being hit with multiple rounds of tariffs over the past five years, their prices have remained relatively stable—or even decreased. This isn’t because tariffs vanished, but because firms adjusted. Some moved sourcing from China to Vietnam or Mexico. Others redesigned product categories to fall under different HS codes, avoiding the highest tariffs. Many simply accepted lower margins to stay price competitive.

This adaptive behavior blunts the inflationary effect at the consumer level. In economic terms, the elasticity of substitution—how easily buyers or sellers can switch inputs—plays a critical role. The more agile the supply chain, the less likely a tariff will flow through into prices. Compare that with energy or food, where price shocks are often immediate. In those markets, producers have fewer options. Tariffs in high-substitution sectors, by contrast, tend to reroute trade, not inflate it.

If tariffs aren’t the main inflation culprit, then what is?

The most persistent cost increases across developed economies are happening in non-tradable sectors—areas where goods and services can’t easily be imported or substituted. These include:

• Housing and rent
• Childcare and eldercare
• Health insurance and medical services
• Domestic transport and logistics
• Education and in-person services

These sectors share three key traits:

1. High labor intensity
2. Structural supply constraints
3. Limited automation or offshoring potential

Take housing. Supply chain friction in construction materials post-COVID was one factor. But the bigger issue is zoning restrictions, labor shortages in skilled trades, and regulatory inertia. No amount of tariff cuts can build houses faster.

Or childcare: the problem isn’t toy prices—it’s the lack of affordable, qualified caregivers and facilities that meet safety and staffing standards. The same goes for eldercare and nursing homes, where staffing deficits and rising demand collide.

Healthcare and insurance costs have also surged, driven by pricing opacity, wage pressures in care roles, and demographic shifts—not imports or tariffs. This tells us that inflation’s real engine isn’t international trade—it’s domestic system friction. And that has major consequences for how we allocate blame, and how we fix it.

So where does this leave the role of tariffs in public policy and corporate planning? The unexpected lesson is this: tariffs aren’t inherently inflationary—they’re situational. And when managed with foresight, they can serve as levers for strategic goals rather than blunt-force economic harm.

This offers cover for governments pursuing “smart protectionism”—targeted trade policy designed to support national security, critical industries, or fair competition. If the inflationary impact is muted (as recent data suggests), policymakers can act more boldly without triggering voter backlash tied to living costs.

But it also means companies need to upgrade their playbook. The traditional approach—pass costs to consumers or absorb the hit—has given way to something more sophisticated:

• Multisourcing: Firms with diversified vendor bases across Asia, Latin America, and Eastern Europe were able to shift quickly as tariffs changed.
• Nearshoring: Regional manufacturing closer to demand centers (e.g., Mexico for U.S. firms, Eastern Europe for EU businesses) helped minimize delays and price volatility.
• Product redesign: Businesses broke up SKUs, reclassified goods, or bundled offerings to bypass tariff lines without compromising consumer value.

In this light, tariffs become a forcing function for supply chain agility, not just a tax. And the winners are those who built for optionality, not just cost efficiency.

Zooming out, inflation today looks less like a monetary problem and more like a coordination failure in key domestic systems. Housing, healthcare, education, and care work all suffer from chronic underinvestment, regulatory bottlenecks, and outdated delivery models. This has made them non-responsive to traditional inflation tools like interest rate hikes or fiscal tightening.

Worse, these sectors often operate on long time horizons: you can’t fix teacher shortages or eldercare infrastructure overnight. That’s why the inflation outlook has become so bifurcated—falling goods prices next to persistent service costs. This means we need to stop fixating on tariffs as inflation’s smoking gun and instead ask harder questions about structural bottlenecks. It’s not just about trade—it’s about throughput.

For example:

• What’s causing the long permit times for multifamily housing?
• Why are vocational training pipelines broken?
• What regulations are preventing capacity growth in childcare or home health?

Until these answers become central to inflation debates, we’ll keep misdiagnosing the disease.

Implications:

For business leaders:
If your inflation strategy focuses solely on tariff hedging, you’re missing the bigger picture. Domestic cost pressure now trumps trade risk. Invest in supply chain resilience, but don’t neglect service delivery optimization, labor retention, and logistics efficiency.

For CFOs and pricing teams:
Don’t reflexively pass on tariff costs. Ask whether substitution or redesign offers more leverage. Margins matter—but so does customer retention, especially in price-sensitive sectors.

For policymakers:
Tariffs aren’t the enemy of price stability. Misalignment in non-tradable sectors is. Shift the inflation narrative toward capacity building and regulatory reform, especially in housing, care services, and education.

For consumers:
If you're frustrated with high prices, look beyond global headlines. Your rent, insurance, and daycare costs reflect national policies and domestic constraints—not just geopolitics.

Tariffs haven’t gone soft—they’ve gone strategic. The inflation story of 2025 isn’t one of runaway prices from trade wars. It’s a tale of resilience through substitution and domestic inertia in core services. Blaming tariffs for every uptick in the CPI is no longer analytically honest. In fact, the muted response in many product categories suggests businesses are absorbing shocks more effectively than policymakers expected.

The real challenge? Fixing domestic systems that can’t pivot. Where global supply chains flexed, housing permits stalled. Where product sourcing adapted, healthcare hiring froze. The lesson: inflation won’t be solved with border tweaks—it will be solved with system redesign. So let’s retire the knee-jerk fear of tariffs and redirect the conversation. Inflation is still with us—but its roots are far more local, structural, and stubborn than most admit.