Will tariffs cause greedflation?

I think we finally have it: a test of greedflation.

Okay. That’s not quite true. Greedflation has always been too vague to qualify as a theory. But there has been a broad class of explanations of inflation that point to similar mechanisms that aren’t just simple supply and demand.

So let me do a bit of a bait-and-switch. We don’t have a test of the meaningless greedflation.

But I think we have a test of “sellers’ inflation,” a theory from Isabella Weber and her coauthors. Their theory gained traction during the post-COVID inflation surge, arguing that firms used supply shocks as "cover" to coordinate price increases beyond what costs alone would justify. The problem? The theory was never precise enough to generate testable predictions that distinguish it from standard supply and demand.

I now see a reasonably clean test between supply and demand and sellers’ inflation. It’s coming from tariffs.

Supply and Demand Makes Clear(er) Predictions

The beauty of basic price theory is its clarity. When both price and quantity rise, you have a demand shock. When price rises while quantity falls, you have a supply shock. These are testable predictions about how markets respond to different types of disturbances.

Moving beyond supply and demand, we have slightly more complicated models that make additional predictions. As Josh emphasized in a post on markups and inflation: markups rise with demand shocks and fall with supply shocks, at least under fairly standard assumptions.

As Josh concluded

If the “supply-side factors are driving higher markups” story doesn’t make sense in the context of this simple model, what conditions would have to be necessary for it to make sense? Price theory must discipline our thinking.

What’s the other theory?

Let’s contrast that with other theories on the market. I’ve spent years trying to understand what Weber’s sellers’ inflation theory actually predicts. The basic story goes like this: when costs rise for all firms simultaneously, they can raise prices without losing market share because competitors face the same pressures. This creates an opportunity for "implicit coordination" where firms raise prices more than costs alone would justify.

But this describes exactly what happens under perfect competition. When costs rise for all firms, prices rise. That's supply and demand, not a new theory of inflation.

As I wrote previously

Weber and Wasner want [their theory] to say more than supply and demand. Prices rose more

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