Tariffs Impact on Price

Briefly: Prices are up. The unknown is whether and how much tariffs are impacting prices. Much can be influenced by news reports to the public. Prices did increase on imports.

Are Tariffs Raising U.S. Retail Prices? Econofact

The Issue:

Tariffs on imported goods have risen steeply since President Trump’s second inauguration, to the highest level since 1935. Determining the extent to which tariff increases are translating to higher consumer prices is difficult in the short run. Official price statistics and traditional surveys typically provide data infrequently and with significant lags. Moreover, standard price statistics do not provide information on specific product categories or how goods from different origin countries respond to changes in tariff levels. New research and constantly updated data of online pricing trends at five major U.S. retailers provides a window into how goods prices are changing in real time. The emerging evidence from this data shows that goods prices have indeed been increasing in response to tariffs, although the magnitude of price increases to date remains modest relative to the announced tariff rates.

The Facts:

• The extent to which a tariff increase is reflected in consumer prices depends in part on how the burden of the tax is distributed between foreign producers, domestic businesses and consumers. Tariffs are taxes paid to the federal government by the importer of a foreign good when the good crosses the border. Although tariffs are paid by the business that makes the purchase abroad, who ultimately bears the cost can vary depending on the characteristics of the market for each imported good. In some cases, foreign producers could absorb a portion of the cost if they lower prices in order to continue having access to the U.S. market. Domestic retailers or businesses that use the foreign goods as inputs could also absorb some of the additional cost in the form of reduced profits. The tariff cost can also pass-through to consumers in the form of higher prices. Ultimately, determining how much of the tariff is passed through to consumer prices and how long it takes for this to happen is an empirical question. 
• Prices of imported products rose in response to tariff announcements. In our research we track daily changes to the prices of over 350,000 products sold at five large U.S. retailers. Overall, prices for imported goods in our data have increased by approximately 4% since early March (5.4% when compared to the declining pre-tariff trends shown in the chart). Our data allows us to see whether any noticeable changes coincide with tariff announcements. We observe little immediate effect on import prices when changes on tariff policy began with a rate of 10% on Chinese goods on February 4. But prices moved noticeably following new tariff announcements as tariff policies have since expanded. Prices of imported goods increased by approximately 2 percentage points immediately after the U.S. imposed 25% tariffs on imports from Canada and Mexico, along with an additional 10% tariff on Chinese goods, on March 4 (see chart). The rate of price growth for imported goods accelerated again after “Liberation Day” on April 2, when a baseline 10% tariff on goods from all countries was announced. Prices saw a modest short-lived decline across all goods when the U.S. temporarily paused the additional tariffs on Chinese goods for a 90-day period on May 12. More recently, prices rose again after July 7, when the United States notified several countries of an August 1 deadline for higher tariffs. However, they later stabilized amid legal challenges questioning the validity of those tariffs.
• The rate of price increases varied significantly depending on the country of origin of imported goods. Among the United States’ main trading partners, we find that imported goods from China experienced larger and more persistent price increases than goods from Canada and Mexico, which showed smaller adjustments. It is possible that tariffs on Canada and Mexico were perceived as more temporary and an important share of goods covered in the U.S.-Mexico-Canada (USMCA) trade agreement were exempt from tariffs. Goods from other countries, including Turkey, Poland, the United Kingdom and Japan saw among the largest price increases. However, because China accounts for over a third of all the products in the sample studied, Chinese imports drive much of the overall increase in import prices that we observe. Among the different categories of goods, the largest price impacts were concentrated in “Furnishings and household goods”, which include many Chinese-made products.
• It is not just the prices of imports that have increased. The prices of goods produced in the U.S. have also risen in response to tariff announcements. Since early March, prices of domestic goods in our data have increased by approximately 2% (the increase is 2.6% relative to the prices predicted by pre-tariff trends). There are different possible channels by which taxes on imports can affect the prices of goods manufactured in the United States. For instance, many U.S.-made products rely on imported components, packaging, or raw materials that come from tariffed countries. Firms may raise prices to reflect rising input costs. In addition, as tariffs make imported goods more expensive, goods that are manufactured in the United States that compete with or are close substitutes for imports can expect an increase in demand and may also increase their prices.
• To better understand one role that tariffs may have had on the prices of goods produced in the United States, we separate domestic goods into those in categories that have been directly targeted for tariffs or that belong in a category of products where more than 50% of goods are imported — from those in categories that are less directly exposed to international trade. We find that the prices of domestic affected goods rose at roughly the same rate as imported goods following the tariff announcement in early March and then also rose following the tariff announcements in April, but at a slower rate than the prices of imports (see chart). By contrast, domestic goods in unaffected categories experienced a far more gradual and milder increase. This strongly suggests that the increase in domestic goods prices we observe is mostly due to competitive pricing decisions for domestic goods in the same categories as affected imported goods. The fact that domestic goods in unaffected categories also rose, albeit by a smaller rate, could indicate that retailers might have raised the prices in these categories to “spread the pain” on consumers, protect their margins amid growing uncertainty, or to preserve relative pricing structures across different product categories. 
• Our observed average price increases — at 5.4% for imported goods and 2.6% for domestic goods — are moderate relative to the size of some announced tariff rates, particularly on Chinese products. These short-run pass-through findings are consistent with patterns observed during the first round of trade tensions in the first Trump Administration. At that time, the magnitude of retail price increases was also modest, though some products facing highly visible tariffs, such as washing machines, saw relatively rapid price increases (see here). Our past research pointed to a range of short-run retailer adjustment mechanisms that are also likely taking place today, such as margin reductions, front-loading of inventories before tariffs became effective and shifting the sources of imports to circumvent tariffs.

What this Means:

Our findings are consistent with a slow and gradual pass-through of tariffs to consumer prices. The fact that domestically-produced goods also experienced price increases, primarily in categories directly competing with imports, highlights the broad reach trade policy can have. But overall, the magnitude of price changes thus far remains modest relative to the size of the tariff announcements. Several factors have likely contributed to this measured short-run response. Some businesses may have been able to delay the pass-through of higher tariffs by using strategies such as front-loading inventories in anticipation of tariffs and substituting towards importing goods from lower-tariffed countries. Increasing uncertainty about the scope and duration of trade measures, together with concerns about consumer backlash, could discourage firms from making immediate or full price adjustments. Over time, as trade policy continues to evolve, firms may adjust more significantly. However, the evidence suggests that pass-through will remain gradual, reflecting the complex pricing decisions firms must make in an uncertain environment.