75% of firms, in a recent regional survey by the Federal Reserve Bank of Cleveland, anticipate selling prices to go up due to the impact of tariffs. The above chart, which shows the actions they expect to take in anticipation of tariffs, suggest a large majority prefer passing on the cost to the consumer. The key aspects are how much the pass through is, how long it is and who takes the hit.
Below are a few of the questions we need to ask.
1) What is the price elasticity of demand, availability & price of substitutes or other quality-adjusted product options? Pricing power of firms could be milder than that during the pandemic.
2) Will the exporter cut prices? Will the importing firm settle for a narrower profit margin? Will the consumer take the hit? Very likely a combination, with pass through a high possibility (see chart).
3) Can products be sourced/produced in the US? Rejigging supply in the near term could be challenging.
4) Are there alternate import sources? Even if there are, and the price is lower than the tariffed price from the other source, the new price could still be higher than the existing price. This results in a deadweight loss, due to tariff induced distortions in market efficiency
5)How does this impact price expectations, which feeds consumer behavior? Currently, shorter term inflation expectations are impacted more, while medium term expectations remain fairly stable. However, manufacturing firms’ cost expectations have broadly risen.
6)How does this impact future demand-supply? Will we have a less optimal equilibrium? Will lower growth more than offset the price impact from tariffs? Investment intentions have eased, and growth expected to moderate. Shorter-term US treasury yields have eased in expectation of more Fed rate cuts, despite expected price increases from tariffs.
Source for the chart: Federal Reserve Bank of Cleveland.
Disclaimer:
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency about the investment strategy / theme of the Scheme and should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of Bandhan Mutual Fund. The information/ views / opinions provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision and the security, if any, may or may not continue to form part of the scheme’s portfolio in future. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. The decision of the Investment Manager may not always be profitable; as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement/document as may be required from time to time. Neither Bandhan Mutual Fund / Bandhan Mutual Fund Trustee Limited / Bandhan AMC Limited, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance may or may not be sustained in future.