Trump’s 25% Iran Tariffs Explained

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1:59Today's number, 218. That's how many decibels of sound a pistol shrimp produces when it snaps its claw. That makes it one of the loudest animals in the world, even louder than Alex Jones. Money market's mad. If money is evil, then that building is hell. The show goes on! The folks are never watched the show, show! Welcome to Prof G Markets. I'm Ed Elson. It is January 14th. Let's check in on yesterday's market vitals. Major indices fell from recent highs. Treasury yields declined after the latest inflation report. More on that later. Oil prices rose on Trump's comments on Iran. We'll get to those in a moment.

2:45And finally, JP Morgan shares dropped 4 % after fourth quarter investment banking fees missed expectations. Okay, what else is happening? President Trump announced a 25 % tariff on any country doing business with Iran. Trump wrote that the order is, quote, effective immediately and that the decision is final and conclusive. However, the White House has not yet explained how the tariffs would be enacted or by what authority. It appears the move is a response to the Iranian government's violent crackdown on protesters, which has resulted in thousands of civilian deaths in a Tuesday morning Truth Social post.

3:22President Trump said he has cancelled talks with Iranian officials and he's urged Iranians to, quote, keep protesting and take over your institutions. The protests began in late December as inflation and Iran's collapsing currency, the rial, made everyday goods unaffordable. They've since gained momentum, morphing into wider demonstrations against the Iranian regime. Here to explain the situation in Iran and what these tariffs might mean for the country. We're speaking with Maurice Obstfeld, former chief economist for the International Monetary Fund and senior fellow at the Peterson Institute for International Economics.

4:00Maurice, thank you for joining us on Prof G Markets. So we've seen this crackdown from the Iranian regime. Then we see the tariffs announced from Trump. Just as a beginner, what is actually happening in Iran? What are these protests about? And what is the economic situation over there? Well, the economic situation has obviously been grim for many years with ongoing sanctions. When Trump came into office, he rescinded some of the very mild waivers that Biden had issued in order to promote nuclear talks. And so that intensified the pressure. Furthermore, we've seen the Iranian regime weakened geopolitically over the course of the year with Israeli and U.S.

4:55strikes, with the evisceration of Iran's proxies abroad. And that too has harmed the economic situation. So as a result of that, you know, what we've seen is the government basically trying to pay its bills by printing money. That sparked inflation. It sparked a huge depreciation of the Iranian currency, a huge, I should say, an accelerating depreciation. So over the last year, the currency fell by more than 80%. It fell by around 16 % in December alone. Last year's inflation rate, we believe, was above 50%. This year, it's bound to be higher. So all of this has spilled over into frustration in the streets, starting with economic demonstrations, but then building up into a much wider conflagration that's spread across the country, including outside of the main urban areas, and reflecting a lot of frustration with the regime, with the corruption that people see, with the trampling of basic freedoms.

6:13And it looks like this is much more significant than the 2022 demonstrations and probably the most severe threat to the regime internally since its beginning in 1979. It seemed like everything reached a tipping point in December, or at least last month and last few weeks or so. Seems like a lot of this is economic, the hyperinflation, you mentioned also the collapse of the currency. What triggered this outburst that we've seen in the past month or so? It seems to be really tied to the currency and the effect on inflation and what that's doing to just the cost of living. There's also been severe infrastructure crises, which I think are also contributing.

7:09The crisis over water availability has really been a severe problem. And that historically throughout the Middle East, throughout the earth, droughts, shortages of water lead to severe social dislocation. So it's not really surprising that all this is coming to a head. The country, the regime have both been under extreme economic and geopolitical pressure. And sometimes you just see these explosions. Some smaller demonstration can metastasize, not unlike what we saw on a much larger scale in Eastern Europe in 1989. Again, there were pent-up economic frustrations, pent-up frustrations about corruption, and then you get an explosion.

8:04So then we see this violent crackdown from the Iranian regime. Civilians murdered. Many have died. And then in response, tariffs. It seems like that has been the response from Trump. He's talked about the violence that we're seeing. And he said, and in addition, we're putting this 25 % tariff on Iran. And also anyone who does any form of business with Iran. What do we know about the tariff? What do you make of this policy? Well, the administration is also supposedly considering military options. Not clear what those are. But the tariff has been the all-purpose Trumpian response to everything he doesn't like.

8:52So to some degree, I think they get discounted by the markets and even by some of the targets at this point. You know, the tariffs are supposed to fall on U.S. imports from countries that, quote-unquote, do business with Iran. The major trading partners for Iran are China, first and foremost, but also the UAE, Turkey, Iraq. And, you know, we have substantial trade with both Turkey and the UAE. in negotiating trade deals with those countries, as with China. We depend on Turkey as a regional and NATO ally. We depend on the UAE as a geopolitical ally in the Middle East. So, you know, the betting is probably that either these countries will cut off trade with Iran, pressuring the regime, which I very much doubt that can happen in a short time horizon, Or that these countries will pressure the Iranian regime to go easy on the protesters, which I also think is not very likely to happen.

10:11The Iranian regime is fighting for its life. So I see these as being mostly performative. You know, the countries know at this point, everyone knows at this point that there are deals to be made and that the use of tariffs for posturing is a, you know, a standard part of Trump's toolbox. So, you know, at this point, we have to see what is exactly imposed, what is involved and what ends up sticking. But I don't think it's going to have much impact on the situation in the ground and around. Right. The regime is not looking at these and saying, you know, oh, my God, we better negotiate or go easy on the demonstrators.

10:57I think they're much more worried about the military threats that U.S. could deploy. Yeah, it seems that, as you say, tariffs are a form of threat, and then also military action are a form of threat. To use those two threats in the same sentence seems a little bit pointless. One of them is far more severe than the other. I assume the tariffs are therefore just kind of pointless in that sense. Well, they're more severe, but they also inflict self-harm on the United States. They implicate trade deals that are sort of in progress. I mean, you make a deal with Turkey, say you negotiate for many months, and then suddenly you say, well, actually, we're not going to respect that deal because we need to – because you're trading with Iran.

11:57and Iran is being horrible to its people. But, you know, it was known that Turkey was trading with Iran. This isn't news to anyone. So, you know, the governments that have made trade deals can rightly say, OK, well, you know, why didn't you bring this up in the first place? We'll keep following this. I'm sure we'll probably have you back on to keep discussing this. What do you think happens next if you had to make predictions about how this will start to play out at this point? Well, as I said, I don't think that the tariffs are really going to be a material factor in all this. I think the big uncertainty is if and when the Trump administration will use some sort of military intervention and what that will be and what sort of destabilizing effects it can have on the ground and whether it'll bring the regime around or just induce them to attack American assets that are nearby, which some in the Iranian hierarchy very much would like to do.

13:03You know, Trump has clearly been flexing his military muscles on the global stage and seems somewhat intoxicated with that. So it wouldn't surprise me to see some sort of military strike. You know, the question is, does a one-time action as opposed to some sort of sustained military pressure actually have a big effect on the situation there? Sustained military pressure, I think, would raise questions by Trump's MAGA base in the U.S. about what is he doing. Is there anything that we could predict about what will happen in markets if we see some sort of military action? Do you think that this would be a particularly explosive event for markets?

13:53Or perhaps it's already kind of assumed that we're going to get violent? Well, it could affect oil prices. Oil prices have already factored that in to some extent. I don't see big regional geopolitical spillovers. You know, Russia, China are not going to come to Iran's defense in this situation. I'm like noises about it. So I think it would probably end up being a fairly contained event. But the question is, would it actually make things better in a sustained way? Bring down the regime. and if the regime is brought down, then what's the plan for the day after? And I don't think there's a plan for the day after.

14:43This could become, you know, Middle East is already a fragile place and there are unintended consequences from further, you know, dropping matches onto the tinder. Okay. Maurice Obstfeld, former chief economist for the International Modelary Fund, senior fellow at the Peterson Institute for International Economics. Maurice, as always, appreciate your time. Thank you. It's been a pleasure, Ed. Thank you. After the break, another look at inflation. If you're enjoying the show, give Profit G Markets a follow.

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18:07We're back with Prof.G. Markets. December inflation data came in without much of a shock, but costs remain high. According to the Consumer Price Index, headline inflation held steady at 2.7 % year over year. That is unchanged from November and in line with forecasts. Meanwhile, core inflation rose 0.2 % month over month and 2.6 % year over year, slightly below estimates. Still, food, shelter, and energy prices increased in December up on the month and the year. The big question, however, is, is this data even right? because as we discussed last week, the government shutdown did impact the CPI report from November.

18:47And then the question now is, did it affect this one too? Here to help us answer that very important question, we have Mark Zandi, Chief Economist at Moody's Analytics. Mark, thank you for joining us again on Prof. G Markets. Thanks, Ed. It's good to be with you. So my first question to you, we discussed the previous CPI report and you explained to us how the previous one from November was flawed. We've got a similar report, a similar number, 2.7%. I guess my first question to you, is this report flawed as well? That number is. It's a year-over-year growth rate. And so it reflects the problem the Bureau of Labor Statistics had back in October when they couldn't conduct the survey.

19:32And as a result, they assumed no change in prices for the vast majority of goods and services that they include in the CPI. So if you make an adjustment like we've done, like we did this last month and we did this month to account for that problem, inflation, CPI inflation is still 3 % year over year. Core CPI inflation, excluding food and energy, is 2.9%. So, you know, once you make the correction for what happened in October, inflation is still elevated and persistently elevated. So I feel like this is a far larger story than what we're seeing in the news right now, where people are just kind of taking these numbers at face value.

20:15and what you're telling us is you're running your own analysis that is making up for the adjustments that they missed in October, which says that it's not 2.7 percent, it's 3 percent. And considering this is one of the biggest issues in the nation right now, I think that this should be kind of more of a big deal, or at least people should talk about it more. I guess, tell us more about how the report is flawed. Like, we know that they were missing data in October. How does that affect both November and December in the CPI report? Well, there was no data in October. There was no survey because the government was shut down.

20:58So what does the Bureau of Labor Statistics do? They assume that prices for the things that they can't measure because there was no survey did not change. You know, they were very transparent. They said, you know, I have no idea what the number is because I didn't conduct a survey. So it's zero. So that means – obviously that's wrong. We know that's not what happened. We know that prices did increase, that there was some inflation. And so because of – but because they assumed no inflation in October, you know, when you look at year over year after October, that's biased lower because of that assumption.

21:34Right. So you want to correct for that. And, you know, there's no slam dunk. This is the right way to do it. But we took a crack at it. And, you know, based on that work, we found that inflation is not 2.7 percent on CPI inflation. It's 3 percent. And, you know, I think most people who really pay attention to this stuff, not the typical American, this would be pretty nerdy for them to get down and dirty with this kind of stuff. But for the folks that, you know, live and die and breathe, you know, what's going on in the financial system, financial markets, bonds, the stock market, folks at the Federal Reserve, you know, they know this.

22:15And they're making their own adjustments. And they're all coming up with the same thing we are. Inflation's about 3%. Yeah. Yeah. Everyone except for basically the person that matters, which is the president who was on Truth Social saying, we have a great low inflation report and taking these numbers at face value, which seems like a problem. I guess we can just put that aside for now. My question, you know, we had this flawed report for November. We have the flawed report for December. How long is this going to go on for, do you think? How long are we going to be dealing with these CPI reports that we get from the BLS, and which make these headlines, but then we have to add this asterisk and say it's not quite right?

23:01Well, Ed, I think you're going to have to keep inviting me back until next October, because the numbers will be biased lower until we kind of do a round trip here and get to the other side. So next October. But even then, you've got the problem on the other side because then it'll be biased too high because these numbers we're looking at today are too low. So, you know, the work all this out of the data probably takes several years. So but, you know, right now it matters most because we're most worried about inflation and in the context of the tariffs and policy and Fed policy and interest rates and everything else.

23:39So I think for the next year, that's when it really matters. and this will be the case, you know, all the way through next October. If we were to just look at these numbers that we did see in the report, and now that we've gotten all of the gigantic asterisks out of the way, let's just sort of look at the numbers. One thing that was striking, to me at least, energy up 2.6 % year over year, but there's some nuance here. Gasoline prices down 3.5%. Electricity prices up 6.7%, nearly 7 % increase in electricity prices. This jumped out to our research team. I guess our question is, is that data centers?

24:21Is that AI? Do we have any - That's AI. That's AI? Straight up, straight up AI. I mean, the demand for electricity from data centers is enormous. It's putting a lot of pressure on the electric power grid and generation. And the prices are rising very, very rapidly. The other thing that happened last month, though, was natural gas prices also jumped because it was cold in many parts of the country. And home heating was, you know, important. And that pushed up the price of natural gas. So that also contributed. But the cost of light, we buckle up. I mean, this is not going away. The data center phenomena is just in early innings.

25:00And so we're going to see a lot of demand from these AI data centers. And that's going to juice up electricity prices. Now, of course, the power companies, you know, they know all this and they're working hard to bring on new capacity. So, you know, I suspect a year or two, three down the road, this will abate. But for the next year or so, I think we should all, you know, just be prepared for higher electricity prices. So we've got higher electricity prices. We should expect them to go up because, I mean, this AI train isn't stopping anytime soon. We've got 3 % inflation based on the adjustments that you've made for what we didn't see in October.

25:38Fed's target is 2%. Meanwhile, there is now a criminal investigation into the Federal Reserve about a building. But most people agree this is really about reducing interest rates even further. um what do you make of what happened this week between trump and powell and what does this mean for inflation going forward none of it's good i don't see any upside here it's all downside all shades of gray and you know uh darkness uh i mean you know we know that a cornerstone of a well functioning market economy like our own is a independent central bank and independent independent We know this from history.

26:22I mean, our own history. You can see here on the Nixon tapes, the conversations between President Nixon back in the early 70s and his friend who was chair of the Federal Reserve, Arthur Burns, at the time. And they kept rates lower than they would have otherwise in an effort to juice up the economy in the lead up to the 1972 election. And by so doing, they laid the stage for the inflation that followed. And it was a terrible period of hyperinflation that ultimately ended in, you know, Paul Volcker coming in, slamming the economy with higher interest rates and pushing the economy into a deep recession.

26:56There was a lot of other factors involved in that inflation in that very dark time. But, you know, one key factor was the loss of Fed independence. And, you know, we have experience overseas as well. Other countries like Argentina, Turkey, you know, even the British, the UK, you know, not only until recently, the Bank of England was not independent. And you could see it in their inflation statistics. Their inflation numbers are higher. So that's the outcome of a Fed or a central bank that loses independence. The predisposition is going to be of the executive branches to keep rates low, to try to keep the economy moving and strong leading into an election and overdoing it, and the result will be inflation.

27:36So that's kind of the direction of travel here, and so why this is such a disconcerting thing. And, you know, hopefully the Fed can maintain some semblance of independence going forward. Do you think it will? I mean, I think one thing that has been interesting has been the market's reaction where we haven't seen that much of a reaction. And we were having this debate in our episode yesterday about why that is. Maybe it's because we've kind of seen the strength of the Fed in Jerome Powell's video. Maybe it means that the Fed truly is independent. Maybe because the investigation isn't that serious.

28:14Maybe because the markets just don't seem to care anymore. it's some sort of taco effect. But does it genuinely worry you from an inflation perspective? Do you think that realistically, this will actually lead to worse inflation given what has happened in the past 48 hours? No, not yet. I think that's why investors are still kind of sitting on their hands waiting to see because there's a lot of things that are going to transpire here in the next few weeks, few months. You know, one, obviously, is the president's going to nominate a new chair to the Federal Reserve, Chair Powell. His term is up as chair in May.