00:00My base case is that tariffs will increase the price level, but they won't leave a lasting imprint on inflation.
00:07And given this base case, monetary policy should look through tariff effects on prices.
00:13Why? Let me start with the economics.
00:16Here, the lessons from economic theory are clear.
00:19So long as expectations are anchored, increases in prices due to supply effects do not turn into an inflation problem.
00:27Going beyond the theory, the data so far have largely been consistent with this view.
00:33We're definitely seeing the effects of tariffs in the inflation data.
00:37The increase in goods price inflation is clear.
00:39But relative to what our analysis predicted, tariff-induced price increases have been somewhat smaller than anticipated.
00:47Now, we have seen some strength in services prices as well, and this bears watching.
00:51It would be a problem if tariff-induced price increases spill over to inflation more generally.
00:56That said, I don't see conditions as supporting problematic spill overs right now.
01:03First, labor market conditions are very different than they were during the pandemic, when turnover was elevated and workers were job-hopping to get higher wages.
01:12Some of my contacts have described lowering starting wages, for example.
01:17This is not what I would expect to hear if the labor market was going to be a force that accelerated inflation.
01:25Second, many firms report being focused on preserving market share, and this makes them motivated to find creative ways to avoid passing along increased costs.
01:35Finally, monetary policy is modestly restrictive and has been for some time.
01:41The flip side of the famous long and variable lags axiom is that the effects of past policy persist over time.
01:47For me, the bottom line is I simply don't see the type of conditions, especially in the labor market, which seem likely to turn tariff-induced price increases into sustained inflation.
01:59But I reach this conclusion with an awareness that we need to be careful.
02:03We've heard a lot about how uncertainty is delaying some investment projects.
02:07When there's greater clarity, we could see a burst of growth.
02:10And after four-plus years of above-target inflation, it's important to consider the ramifications.
02:16Firms have had a lot of practice raising prices, and consumers have had to get used to a lot of price increases as well.
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