On Monday, March 4, 2025, the Trump administration announced its intention to move forward with tariffs on Canadian, Mexican, and Chinese imports. Predictably, legacy media outlets opposed to the administration have rolled out “expert economists” who claim that these tariffs will lead to inflation. But is that actually true?
A tariff is essentially a tax on an imported good. To understand its impact, let’s imagine a micro-economy with a basket of five goods (A, B, C, D, and E), each priced at $20, making the total cost of the basket $100. If we introduce a 25% tariff on Good A, increasing its price to $25, the consumer, still limited to $100, must now make trade-offs. If Good A is essential, they will need to forgo purchasing one of the other goods. Alternatively, they could skip Good A and buy the remaining four. The only way the consumer could afford to purchase the entire basket at its new price would be if an additional $5 were introduced into the economy.
This brings us back to our so-called expert economists. I find it alarming how often inflation is misrepresented in mainstream media. Audiences, unfamiliar with economic fundamentals, take these experts at their word without questioning their logic.
In our micro-economy example, the basket of goods represents the core components of the Consumer Price Index (CPI), often cited as the measure of inflation. The $100 represents the money supply. If the price of one item increases due to a tariff, but the overall money supply remains constant, consumers must adjust their spending, reducing demand for other goods. Prices for those goods may decline, or, in extreme cases, production may halt due to lack of demand. The key takeaway is that inflation is a function of the money supply, not the price of individual goods. Tariffs influence consumer behavior, but they do not inherently cause inflation.
You cannot sustain higher prices across the board unless there is an increase in the money supply. Tariffs create winners and losers—in this case, they aim to benefit American producers while disadvantaging foreign competitors—but they do not inflate the currency. Yet, many people accept the flawed assumption that any increase in price equals inflation.
Consider this: When the government raises taxes on cigarettes, is that inflation? When a state increases its sales tax, is that inflation? When gasoline is taxed more heavily, do we call that inflation? Of course not. It is just as misguided to claim that tariffs are inflationary.
Elasticity and the Tariff Debate
Elasticity is a crucial concept in this discussion. A good is elastic if consumers have readily available alternatives at a similar cost. For example, if Jojo’s gas station sells fuel at $5 per gallon while Bobo’s across the street sells it for $4, consumers will flock to Bobo’s. Because alternatives exist, gasoline in this case is an elastic good.
But if Jojo’s gas station is the only one in town, his gasoline becomes inelastic, meaning consumers must buy it regardless of price. This dynamic applies to many goods affected by tariffs. If substitutes exist (such as shifting from Chinese-made goods to domestic production), consumers will adjust. But where there are no immediate alternatives—as with certain semiconductors or specialized materials—tariffs may increase costs. However, without an increase in the money supply, consumers will have to cut spending elsewhere, maintaining overall price stability.
Inflation: A Monetary Phenomenon
Inflation is the decline in the purchasing power of a currency, not merely an increase in the price of select goods due to taxation or tariffs. Inflation results primarily from an expanding money supply, its velocity, and weak economic growth. As Milton Friedman famously stated, “Inflation is always and everywhere a monetary phenomenon.”
In the U.S., inflation is driven by persistent deficit spending, forcing the Treasury to issue massive amounts of debt. The Federal Reserve, in turn, effectively prints money to monetize this debt. Politicians, media figures, and even some economists deflect blame, attributing inflation to supply chain issues, tariffs, or other external factors. In reality, these are secondary effects, while the root cause remains monetary policy. Those pushing the tariff-inflation narrative are either misinformed, dishonest, or ideologically driven.
Challenging the “Experts”
How can you challenge an expert economist on television claiming that tariffs cause inflation? Simply look at history. The Soviet Union, Venezuela, Cuba, and countless other failed economies were filled with “expert economists” who insisted their policies were sound. They were disastrously wrong. Being labeled an “economist” does not make one infallible—too often, ideology and politics cloud their judgment.
The recent history of the United States provides further proof. Joe Biden’s economists assured the public that the Inflation Reduction Act would not cause inflation. Instead, it did, making a mockery of its name. Similarly, Janet Yellen, former Federal Reserve Chair and later Treasury Secretary, confidently declared that inflation would be “transitory.” Yet here we are, still dealing with its effects three and a half years later. Her statements were not based on economic reality but on ideological bias, and she was, quite frankly, wrong.
Implications for the Precious Metals Market
What is undeniably true is that tariffs on Canadian imports will make products like the Canadian Maple Leaf and other Royal Canadian Mint coins more expensive compared to readily available alternatives such as the U.S. American Eagle. As a result, we expect billions of dollars in demand to shift from Canadian products to American Eagles. However, the United States Mint has not increased production capacity to accommodate this influx, meaning that premiums on American Eagles will likely rise across all sizes. At Cole Metals, we have long advocated for the American Eagle in investor portfolios, and given these economic shifts, our stance remains the same.
Final Thought: Inflation is a monetary issue, not a tariff issue. Understand the distinction, and don’t fall for media misinformation.
