During the most recent presidential election, some supporters of President Trump voted for him with the hopes he would lower the cost of every day goods. Some believe his proposed tariffs could play a major part in doing so.
Michael Clark is Director for Center for Business and Economic Research at the University of Kentucky. He said inflation is on its way down.
“If you look back a year or two ago, the inflation rate was pretty high. We've seen inflation come back much more in line with the Federal Reserve's target.”
Clark said that target rate is right around 2% per year.
“Year over year, we expect prices to increase about 2% and that tends to be a rate they feel is fairly manageable. If it's fairly predictable and a low level of inflation, that's kind of the ideal situation for the economy.”
He said while the rate of inflation is coming down, prices are still going up and that can cause some problems for people in lower income areas.
“We seem to be generally moving toward that goal of 2% but it's going to take some time to actually get there, and it may be kind of a bumpy ride as we get inflation back to that 2% target.”
Many politicians claim that they will help lower the prices of everyday goods such as groceries for Americans.
Many of the people who voted for President Trump did so, specifically with this hope in mind. However, Clark said it is a challenging promise for any politician to keep.
“The issue is, a lot of this is driven by the market. So, it's a kind of situation when demand is high and supply is not keeping up with the increase in demand, then prices are going to go up. So the issue is making sure supply can keep up with demand.”
One way an administration can make an impact is working with the Federal Reserve. Clark explained what the Fed does.
“Implementing monetary policy, they increase interest rates, that makes it more expensive for us to purchase goods and services that we may pay through debt on credit cards, mortgages or car loans, things of that nature, that tends to slow down demand.”
Speaking of demand, another area the new administration is looking is tariffs. A tariff is a tax on goods that are imported from foreign countries into the US, but can go both ways. The burden of tariffs does not necessarily fall on the foreign company that's bringing goods into the country. Clark said it's a bit more complicated.
“These tariffs are basically increasing the cost of these goods. That is, if you're a foreign company, you're bringing your goods into the US, you're going to have to pay this tax, this tariff, that means that cost of doing business in the US is going to be more expensive for you, that's going to cause you to increase your prices, so, US consumers who are going to purchase these goods are going to be paying higher prices.”
He said the big question is, how will American consumers respond to these higher prices?
“They may just simply go ahead and pay those higher prices. In which case, the burden of the tax, or this tariff would fall on the US consumer instead of hurting the foreign company. But it really depends on how sensitive those US consumers are to those higher prices.”
Tariffs could also have a major impact on Kentucky specifically. Manufacturing has been on the rise for a while in the commonwealth, and Clark said these industries could see some problems.
“A lot of the inputs into the goods that we produce or manufacture in Kentucky are imported. In some cases We may have parts that are moved across the border multiple times as they eventually go into a final component such as an automobile. Each time that ends up being a tariff that would have to be paid potentially on these goods.”
That isn't the only thing that has Kentucky leaders concerned. There is the possibility of other countries retaliating with tariffs of their own against the U.S. Governor Beshear reminded Kentuckians recently of what happened during the first Trump Administration.
“The tariffs that the Trump administration put out there on foreign countries resulted in a bourbon tariff from at least the EU. We saw 10's if not 100's of millions of dollars of impact on exports that the bourbon industry was just recovering from.”
He is worried that it could come again, and hurt a state that was a strong supporter of President Trump.
“We are likely to get another bourbon tariff and that will be incredibly detrimental to our Kentucky economy. It will impact Kentucky in a way that will impact no other state, so a state, again, that voted for President Trump by more than 30 points will get hit incredibly hard.”
Governor Beshear said his stance on this is not political, but instead looking out for the people of the commonwealth.
“That's not me being a Democratic governor versus a new Republican administration coming in, that's me being the governor of Kentucky talking about a signature industry that is important to us, and that's me telling you the truth.”
Economist Michael Clark said tariffs aren't necessarily a bad thing. One goal of a tariff is to drive the market to consume more domestically produced products. He said this could provide many benefits.
“If you have a domestic and a foreign company, you put the tariff on the foreign company, that makes them more expensive, that shifts demand to the US company, demand for their goods goes up, they're doing well, they're hiring more workers, so it's kind of an offset.”
For now, the people of Kentucky have to wait and see what action comes out of Washington and how a stroke of a pen could impact their daily lives.
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