It’s still about inflation not tariffs: Markets ignore hysteria as economy improves despite tariffs

Key stock market indices rebounded on Wednesday following news that inflation fell in February to an annual rate of 2.8%, bolstering President Donald Trump’s claim that tariffs would not cause inflation as the stock markets rallied over — or despite — his trade spats with Canada and the European Union.

Analysts had expected a rate of 2.9% after January saw it modestly rise to 3.0%. Consequently, the NASDAQ closed up by 1.44%, while the S&P gained 0.81%. The Dow Jones Industrial Average (DJIA) largely held steady, but closed down 0.20%. The rebounds came after the indices tumbled over the past few weeks over uncertainty about the effect of expected U.S. tariff increases.

The European Union this week announced a 25% tariff on $28 billion worth of steel and aluminum imports in retaliation for Trump’s own. Canada, moreover, is set to impose roughly $20 billion in tariffs on U.S. goods as Trump raises them against Ottawa.

Headlines were filled with fears of bear markets, loss of savings, and talk of a recession on Tuesday after the European Union announced retaliatory tariffs on the United States. The development marked the latest turn as Trump has sought to use tariffs, particularly against Mexico and Canada, to encourage policy changes in those nations. In the case of those two, he has sought to secure more support from Ottawa and Mexico City for stemming the flow of fentanyl into the U.S.

Trump's allies are bullish

Some Republicans dismissed the stock volatility as short-term and a product of the fickle nature of the trade itself. “Wall Street fluctuates on a whim. I mean, the weather could be bad, and the markets will fall,” former Assistant Secretary of State Bobby Charles said Wednesday on the “John Solomon Reports” podcast. The media panic and stock market backlash has Charles pointing to what he dubbed “selective hysteria.” “People need to understand this is not a trade war in the old sense… It's a selective application of a limited tariff in order to get a policy outcome,” he added.

“Tariffs are not going to drive a wild inflation run, okay?” he continued. “What causes inflation is when you overspend at the federal level by billions … that is driven by overspending on the part of the federal government. It is not driven by, you know, peripheral tariffs on things that we can actually make ourselves.”

During an interview with CBS News this week, Commerce Secretary Howard Lutnick indicated that the tariffs were “worth it,” referencing the equities markets' instability. “The only reason there could possibly be a recession is because of the Biden nonsense that we had to live with,” he added.

Former Trump economic advisor Steve Moore said on the “John Solomon Reports” podcast that “there were a lot of worries. I think that this report alleviated some of them. I still think some of the hangover effects are from all the government spending that Biden did.”

“All that government spending does put upward pressure on prices, since it's all paid for by printing money,” he went on. “But I was very happy with that inflation report. It was better than I expected. I want to remind your listeners that in the first term for Trump, you know, we had almost no inflation.”

Trade disputes are far from uncommon

Trump's on-again, off-again tariffs are far from the only trade dispute between the United States and other nations. Bobby Charles highlighted this point while pointing to an ongoing lumber conflict with Canada.

“We probably have globally going on here between the United States, our allies and others, ongoing trade conflicts that have to do with tariffs, probably two or three dozen of them, and they've been going on for decades,” he added. Charles then described President Joe Biden’s imposition of a 15% tariff on Canadian lumber in response to their subsidizing of the industry to deflate prices. Moore, for his part, echoed that sentiment, pointing to the U.S.’s participation in so-called “free trade” agreements with countries that maintain tariffs on American goods.

“But one of the things Trump asked me to do is just look at some of these countries and their tariffs. You know, we have a free trade agreement with Canada, right?” he said. “And so if that's the case, how is it that Canada is charging us over 100% on our dairy products and on our agriculture products. That doesn't sound like free trade to me. And so when I look at what Canada is doing, I think that Trump has a point.”

All about priorities

At the end of the day, however, Moore suggested that the tariffs would not rank at the top of Trump’s most important economic tasks and indicated a preference for addressing trade after securing an extension of the 2017 tax cuts. “The most important thing we have to do this year, by far, is we have to make sure we get that tax cut done so we don't have a $4 trillion tax increase on January 1. So that would just implode the economy if we have that happen,” he said. 

The 2017 Tax Cuts and Jobs Act doubled the standard deduction and cut the corporate income tax rate from 35% to 21%. Trump has sought to make those changes permanent in the next national budget, though disputes within Congress led the House to pass a continuing resolution to fund the government until Sept. 30. The timeline for legislation to extend or enshrine the tax cuts remains unclear.

Charles, on the other hand, looked at the tariffs as key to fulfilling Trump’s core promises of repatriating American manufacturing, saying, “what Trump is doing is he's bringing business back to the United States, because a foreign country that can use this labor that is not competitive with us, if they have to pay more for it, they actually will push their production over here to the United States. It also causes people to buy things.”