The US extended the deadline for implementation of reciprocal tariffs from 09th July to 1st August. But what happened to the price impact of already higher tariffs in the last few months? CPI inflation so far has not shown signs of passthrough. The Fed, at its June meeting, said the uncertainty on this is more about the timing, magnitude and duration, suggesting only a delay. What could be the reasons?
- Importing companies are likely already bearing some of the higher cost – Momentum in Non-Oil Import Price Index increased by 63bps in April-May (vs. 56bps in the previous six months) while that in non-oil industrial supplies has risen by 109bps, with the latter likely reflecting higher steel & aluminium tariffs.
- As per a New York Fed survey in May, ~75% of businesses facing tariff increases in manufacturing & services raised consumer prices by some degree. As per an Atlanta Fed survey, firms on average expect to passthrough 51% of a 10% cost increase, and 47% of a 25% cost increase, without reducing demand. 62% of respondents in a Cleveland Fed survey plan to increase prices over the next 6 months.
- As per a survey of CFOs in June by the Atlanta Fed, even firms which source their inputs domestically expect higher prices by increasing their profit margins. Tariff-impacted firms expect to increase prices by 70%-80% of their unit cost growth.
- Some companies could be waiting on passthrough given frequent changes (pauses, exemptions, escalations, tec.) in tariff policies and thus uncertainty on future tariff rates. They could also be wary of the impact on demand, given weaker consumer sentiment of late. Higher corporate profits since the pandemic could be a factor here.
- Goods shipped from (say) Asia take 1-2 months to reach US ports, wholesalers and then retailers.
- More inventory at lower cost before tariff hikes and products sourced from countries with lower tariffs.
All said, the current effective tariff rate is the highest in several years. The Fed has thus decided to be patient, with rates on hold, with its task to prevent inflationary effects from becoming persistent.
Source for the chart: Federal Reserve Bank of Atlanta, Bandhan MF Research.
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