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Expected versus unexpected Inflation:The role of Trade Policy

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  • Yilmazkuday, Hakan

Abstract

This paper investigates how trade policy shocks, specifically tariffs, distinctly affect the 1-year expected versus unexpected components of U.S. inflation. Using a Bayesian structural vector autoregression model and monthly data from 2007 to 2025, we decompose headline inflation to uncover a powerful and nuanced role for trade policy. We find that tariffs have a statistically significant and positive long-run impact on unexpected inflation. In contrast, while a tariff shock does not produce a statistically significant response in the level of expected inflation, our variance decomposition reveals it is the single largest long-run contributor to its volatility. These effects are distinct from short-run dynamics, where oil prices primarily drive inflation surprises. We also identify a formal structural break in May 2018, after which the effects of monetary policy grew to overshadow those of trade policy. A counterfactual analysis confirms that in the absence of tariff shocks, the inflation path would have been different. A key implication is that trade policy, through tariffs, creates significant long-term uncertainty for inflation expectations, complicating the task of maintaining price stability.

Suggested Citation

  • Yilmazkuday, Hakan, 2026. "Expected versus unexpected Inflation:The role of Trade Policy," The North American Journal of Economics and Finance, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:ecofin:v:82:y:2026:i:c:s1062940825002189
    DOI: 10.1016/j.najef.2025.102578
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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