President Trump demands Mexico provide more water to US under 1944 treaty
President Donald Trump has demanded that Mexico supply more water to the United States under a 1944 treaty or face a 5% tariff increase.
Millions of American consumers have been waiting for President Donald Trump’s tariffs to cause a dramatic increase in consumer prices and push inflation into the red zone.
they are still waiting.
Annual inflation reached 3% in September, the highest level in months following President Trump’s aggressive tariff hikes. Forecasters expect inflation to return to around 3% in November, with figures due to be released on December 18th.
However, many Americans expected the tariffs to cause inflation to rise further.
“The good news is that the economic impact of the tariffs is less than we expected,” said Bill Adams, chief economist at Comerica Bank.
President Trump’s tariffs raised serious inflation concerns
Back in May, a consumer survey conducted by the University of Michigan predicted that prices would rise 6.6% over the next year.
A survey of businesses conducted by the Philadelphia Fed in the third quarter of 2025 predicted that prices would rise 4.7% next year.
These dire predictions hinged on tariffs. Tariffs are taxes, and businesses typically pass on at least some of the cost to consumers.
When President Trump announced significant tariffs in April, many business leaders braced for a wave of punitive inflation.
“The scale and speed with which these prices are hitting us is unprecedented in history,” Walmart Chief Financial Officer John David Rainey said in an interview with the Wall Street Journal in May.
The worst of those fears never happened
Seven months later, the wave never seems to break.
Federal Reserve Chairman Jerome Powell suggested in a Dec. 10 press conference that the United States has little to fear from tariff inflation in the coming months.
Powell said tariff-related inflation should peak in early 2026. And the impact “should not be large,” he says. “It should be two-tenths of a percent or less.”
In other words, the Fed chairman expects that tariffs will have little to no effect on consumer prices in 2026.
3% inflation is not that high. The Fed is aiming for an inflation target of 2%. But it’s not particularly bad either. Economists say that when policymakers talk about an inflation “crisis,” they are usually talking about annual inflation of 5% to 10% or more.
Is an inflation crisis still a possibility? How much have tariffs already increased prices? Will tariffs cause more inflation in 2026? Why didn’t they cause more inflation in 2025?
Let’s answer those questions in turn.
Is an inflation crisis still a possibility?
When it comes to inflation, anything can always happen. However, towards the end of 2025, few observers expect consumer prices to rise sharply in 2026.
Consumers are calming their worst inflation fears. The average shopper currently expects prices to rise 3.2% next year, according to a November survey from the New York Fed.
Economists expect inflation to fall to 2.6% by 2026, according to a November poll from the National Association for Business Economics.
Most economists have never feared an inflation crisis. In April, at the peak of the tariff war, the same NABE survey predicted that inflation would reach a relatively modest 3.4% by the end of 2025.
Currently, most forecasts have been revised downward. For example, Oxford Economics projects that inflation will fall to 2.2% by the end of 2026, slightly above the Fed’s target.
Grace Zwemer, an associate economist at Oxford Economics, said inflation “has already peaked”.
How much have tariffs already increased prices?
So far, tariffs have increased U.S. inflation by about 0.7 percentage points, according to a November paper published by the National Bureau of Economic Research.
So without the tariffs, inflation in September would have been closer to 2% instead of 3%.
“That’s a pretty big difference,” said Alex Jacques, director of policy and advocacy at the left-leaning nonprofit Groundwork Collaborative.
Looking at it another way, President Trump’s tariffs amount to an $1,100 tax increase per household in 2025, according to the nonpartisan Tax Foundation. In 2026, households will pay an additional $1,400.
The Trump tariffs would be the largest tax increase since 1993, according to an analysis by the Tax Foundation.
Will tariffs cause more inflation in 2026?
Many forecasts suggest that tariffs will continue to drive up prices in the first few months of 2026, but not by much.
Fed Chairman Jerome Powell told reporters on Dec. 10 that he expects tariff inflation to peak “in the first quarter or so” of 2026, with little further impact on inflation.
Some other economists agree.
“Inflation from tariffs is still working its way through the supply chain,” said Comerica Bank’s Adams. “And that process is likely to be completed in the first half of 2026.”
But Adams expects inflation to “stay at around 3%” in the coming months.
But other forecasters warn that the impact of the tariffs is far from over.
“Companies are saying they’re still absorbing most of the price shock from imports,” said Chris Rapkey, chief economist at FWDBONDS. “But in 2026, the story may change.”
Why didn’t the tariffs cause more inflation?
Some dire predictions about tariffs and inflation assumed that American consumers would bear the brunt of these taxes.
That didn’t happen. According to a study by the National Bureau of Economic Research, only about 20% of President Trump’s tariffs were “passed through” to consumers.
Its influence weakened every step of the way as imported products passed from the country of origin to American retailers to consumers.
Exporters accepted lower prices for products they sold to U.S. manufacturers and distributors, Adams said. He said the downturn in China’s economy has pushed down the prices of Chinese exports.
Meanwhile, U.S. retailers are “unable or unwilling to pass on the full cost of tariffs to consumers,” partly due to concerns about losing business, said Jack of the Groundwork Collaborative. Some companies sought cheaper versions of the same products from countries with lower tariffs.
Finally, President Trump reversed some of his own tariffs, blunting the impact on consumers.
Between carve-outs, trade agreements and other exclusions, about half of all U.S. imports now enter the country tariff-free, Politico reports.
