Recent discussions surrounding tariffs have highlighted their limited immediate effect on inflation rates, a sentiment echoed by Treasury Secretary Scott Bessent, who described them as the “dog that didn’t bark.” Despite this, analysts are forecasting that the long-term implications of these tariffs will ultimately be felt across the U.S. economy.
As of now, the most stringent aspects of the tariff regime have yet to make a substantial impact. President Trump has opted to delay his “Liberation Day” tariffs by three months to facilitate negotiations with international trading partners. Some progress has been made, particularly with framework agreements established with the U.K., the EU, and Japan, leading to significant reductions in tariff rates compared to the initial threats issued back in April.
However, countries that have not finalized agreements are beginning to feel the consequences. For instance, India has received notifications that it will face a 25% tariff rate, which could potentially double by August 27 due to its dealings with Russian oil. Furthermore, despite numerous claims of nearly finalizing an agreement with China, no concrete deal has been confirmed, merely an agreement to postpone reciprocal price increases.
With a series of tariffs now in place, Goldman Sachs projects that the costs will increasingly be absorbed by foreign exporters over time, although they will remain relatively low in the short term. Economist Elsie Peng noted in a recent report that as of June, exporters had absorbed approximately 14% of the total tariff costs. This figure is expected to rise to 25% by October if the tariff impact mirrors the pricing strategies seen during Trump's first term.
Consumers, however, should prepare for rising costs. According to Peng's analysis, around 36% of the tariff costs were passed on to consumer prices within three months, escalating to 67% after four months. This indicates a growing pass-through rate, although it remains slightly below the rates observed during the 2018-2019 trade war.
In response to the evolving tariff landscape, U.S. businesses are preparing to shift costs to consumers. The Conference Board's U.S. CEO Confidence report for the third quarter revealed that 64% of CEOs were certain they would pass price increases on to consumers, with an additional 16% still contemplating this decision. This rate surpasses previous findings; in June, only 45% of service firms reported intentions to transfer the full extent of tariff-related costs.
Peng's calculations suggest that U.S. businesses have absorbed more than half of the tariff costs so far, a figure that could decrease to below 10% as the situation evolves. This shift indicates that while some firms have taken on a larger share of the costs, others, particularly domestic producers shielded from import competition, have increased their prices and benefited from the situation.
The challenge of maintaining inflation at a target of 2% becomes increasingly complex if consumers are facing higher prices for goods and services. Goldman Sachs projects that tariff effects have elevated the core PCE price level by 0.20% thus far. They anticipate an additional 0.16% impact in July, with a projected 0.5% increase from August through December. This trajectory could leave core PCE inflation at 3.2% year-over-year by December, assuming the underlying inflation trend without tariff effects remains at 2.4%.
Reflecting on the June consumer price index report, Macquarie’s North America economists highlighted preliminary signs of pass-through inflation. They noted significant price pressures in various sectors, including household goods, apparel, and electronics. The core goods index, excluding used cars and trucks, showed a monthly increase of 0.3%, marking its strongest growth since February.
Many economists are optimistic that Fed Chairman Jerome Powell will recognize these inflationary pressures and consider lowering the base interest rate to mitigate potential economic repercussions, especially following a concerning jobs report from the Bureau of Labor Statistics. However, analysts remain cautious, as Powell previously indicated that maintaining current rates could be necessary to avoid unsettling the markets.
