Tariffs and the Second Inflation Scare
In April 2025 the United States launched its biggest tariff experiment since the 1940s, and markets spent a week in freefall before the policy blinked. Part of our Looking Back series on 2020 to 2026, written from 2026 with the price data now in hand.
Liberation Day
On April 2, 2025, standing in the White House Rose Garden, President Trump announced what he called Liberation Day, a sweeping tariff package covering nearly every trading partner the United States has. A tariff is a tax on imported goods, paid at the border by the importing company, and until 2025 the average rate the US actually collected had sat near 2.4 percent for decades. The new package set a 10 percent minimum on virtually all imports, with much steeper country specific rates layered on top for China, the European Union, Japan, and dozens of others.
The scale is the point. Based on actual customs collections, the average effective tariff rate for 2025 came in at 7.7 percent, more than triple the prior year and the highest level since 1947. Whatever you think of the policy, it was the largest change in US trade policy in the postwar era, executed in months.
One Week of Freefall
Markets did not take it calmly. In the days after April 2 the S&P 500 dropped roughly 12 percent, the kind of decline that normally takes a recession to produce, as investors tried to price a worst case where retaliation spiraled into a global trade war. Then on April 9 the administration announced a 90 day pause on most of the country specific rates to allow negotiations, and the S&P 500 rose 9.5 percent in a single session, one of the largest one day gains since World War II.
That whipsaw taught traders a pattern they would lean on all year, sell the announcement, buy the pause. The tariffs that stuck were mostly the 10 percent baseline plus elevated rates on China, while the most extreme numbers from the Rose Garden poster never fully took effect. Courts also spent the year fighting over whether the emergency powers used to impose them were legal at all, adding another layer of uncertainty that markets learned to shrug at.
Markets can price almost anything except a rule that keeps changing. The most volatile stretches of 2025 were not the tariffs themselves but the days when nobody knew which tariffs would exist next month.
The Inflation Everyone Watched For
The second inflation scare is the reason this piece sits in a series about markets rather than politics. The first scare, covered in our 2021 and 2022 entries, came from stimulus and supply chains and peaked above 9 percent. The tariff scare was different in shape. Headline CPI, the consumer price index, ran near 2.6 percent in the year after Liberation Day, unremarkable on its face. The tariff signature showed up in core goods prices, physical products excluding food and energy, which had been falling in 2024 and flipped to rising after April 2025, peaking at about 1.5 percent annual growth in August 2025.
Fed Chair Powell put the tariff contribution at somewhere between half a percentage point and three quarters of a point of extra inflation, which was most of the reason inflation sat above the Fed's 2 percent target rather than at it. That estimate mattered because it framed the tariff effect as a one time price level shift rather than a persistent inflation spiral, which is why the Fed held rates rather than hiking through it.
Who Actually Paid
The textbook question about any tariff is incidence, meaning who ultimately bears the cost among foreign exporters, importing companies, and consumers. The 2025 evidence suggests the cost was split. Some exporters cut prices to hold market share, some importers ate margin, and the rest passed through to shelf prices, which is exactly what the core goods data shows. The federal government, for its part, collected record customs revenue, which supporters counted as a win and critics called a tax increase by another name.
| Measure | 2024 | 2025 |
|---|---|---|
| Average effective tariff rate | 2.4 percent | 7.7 percent |
| Core goods CPI trend | Falling | Rising, peak near 1.5 percent in August |
| Estimated tariff boost to inflation | None | 0.5 to 0.75 percentage points |
What It Did Not Do
It is worth recording what did not happen, because the spring 2025 commentary predicted much worse. There was no recession in 2025. Unemployment did not spike. The dollar did not collapse. Supply chains rerouted rather than breaking, with import patterns shifting toward countries with lower rates. The economy absorbed the largest trade shock in generations with a price level bump and a lot of corporate margin noise, which is genuinely surprising and worth remembering the next time a policy change is described as guaranteed catastrophe.
What it did do was leave a higher cost floor under the economy just as 2026 delivered a genuine oil shock, and that combination, tariff costs plus war driven energy prices, is what pushed inflation back above 4 percent and boxed in the new Fed chair. Policies interact. The tariff story did not end in 2025, it just handed its baton to the next shock.
The Bottom Line
2025 rewired US trade policy at a speed nobody thought possible, tripling the effective tariff rate to its highest level in nearly eighty years. The market crash it caused lasted a week, the inflation it caused was real but bounded, and the uncertainty it caused never fully went away. The honest scorecard is mixed, no disaster, no free lunch, and a permanently higher cost of imported goods that was still feeding the inflation numbers a year later. For anyone learning how markets digest policy, Liberation Day is the best case study of the decade.