Goolsbee’s Tariff Watch: Is Inflation Temporary or Stagflation Risk in Disguise?

Tariffs, Inflation, and the Stagflation Watch: A Data-Driven Reading of Goolsbee's Warnings

On Tuesday, Austan Goolsbee, President of the Federal Reserve Bank of Chicago, warned that tariff-driven price hikes may not be a one-off. The core concern: if inflation proves persistent, the Fed faces a stagflation-like dilemma—rising prices alongside a cooling labor market—without a clear playbook. As the labor market has cooled and the Fed contemplates its next move after the 2025 rate cut, the risk landscape shifts from a simple inflation trajectory to a more complex policy puzzle. The “11% lane” framework—where tariff impacts stay within roughly 11% of GDP (roughly the share of imports in 2024)—offers a crude guardrail, but Goolsbee cautions that tariffs crossing into intermediate goods could broaden the inflationary channel.

Why this matters: the price-channel mechanics

Tariffs on final consumer goods most directly affect consumer prices, but pass-through varies by sector and supply-chain resilience.
The 11% lane implies that, if tariffs remain concentrated on goods, the macroeconomic impact may be limited in scope (relative to total GDP).
Tariffs on intermediate goods—inputs used to produce finished goods—can raise production costs and initiate a deeper pass-through into prices, potentially lifting both goods and services inflation.

If tariffs spill into intermediates: the broader risk

The concern is that tariffs expand beyond a one-and-done price shock. If tariffs lift input costs for manufacturers, finished goods prices may rise, while services inflation can creep higher via higher input costs for services or through complex supply chains. In this scenario, the Fed’s task—balancing inflation against employment—becomes inherently more difficult, potentially requiring a longer tightening cycle or a slower pace of rate normalization.

Data snapshot: what to watch

Metric	What it says	Tariff relevance
Imports share of GDP (2024)	Approximately 11% of GDP from imports	Tariffs could influence a sizable portion of the price level if applied broadly; the 11% lane provides a rough boundary for thinking about macro impact
Tariffs on intermediate goods	Rising production costs propagate through supply chains	Most emphasized risk by Goolsbee; can broaden inflation beyond initial tariff prices
Services inflation trend	Rising in recent months, puzzling in the tariff context	Suggests additional channels beyond pure goods price pass-through; complicates the inflation narrative

Policy implications: a market-friendly, data-first approach

Avoid broad, lasting tariff hikes that bleed into production costs and consumer prices beyond a narrow, well-contained channel.
Preserve free trade as a pro-growth framework. Tariffs are a tax on competitiveness and can distort supply chains, increasing long-run costs and reducing investment incentives.
Let monetary policy stay credible. If inflation persists while the labor market softens, the Fed may face a non-ideal trade-off: holding rates higher for longer versus risking a more fragile recovery if inflation proves sticky.
Prioritize supply-side reforms. Deregulation, productivity enhancements, and targeted investments can reduce the pass-through risk of tariffs and improve long-run growth without enlarging the fiscal burden.

Takeaways for investors and policymakers

Tariffs that touch intermediate goods raise the risk of persistent inflation and a stagflation-like outcome if not carefully contained.
The Fed’s dual mandate remains a tightrope: numeric inflation control versus employment health, especially when both risk moving away from targets.
Policy should emphasize market-based, supply-side improvements over protectionist measures or expansive welfare spending that could crowd out growth and amplify inflation pressures.