Where are the tariff price rises?

Consumer prices rose a modest 2.3 per cent in the year to April, despite months of tough talk on trade and rising border levies. The warnings of stagflation have not yet shown up in the official data, and market commentators and policymakers are asking the obvious question. Where are the tariff price rises?

Part of the answer is energy. Oil prices fell sharply in April as markets priced in slower global growth, and cheaper petrol pulled down the headline figure. Core prices, which leave out food and energy, were also subdued, so the calm is broader than a single commodity.

The headline rate was the lowest since early 2021, before the post-pandemic inflation took hold. Shelter costs, which make up the largest single part of the index, continued to cool slowly, and airfares and hotel prices fell as travel demand softened. The services side of the index, which tariffs barely touch, is doing much of the work in keeping the total down.

Warehouses full of cheap stock

Border duties take a long and uneven time to reach shop shelves. The rush to import ahead of the tariffs in the first quarter left companies holding large stocks of goods bought before the duties applied. Retailers, wholesalers and manufacturers are selling from that stock now, which keeps shoppers insulated from the current import taxes.

The scale of that rush is visible in the national accounts. Imports surged so fast in the first quarter that the economy shrank at an annualised rate of 0.3 per cent, its first contraction in three years, and March brought a record trade deficit. Those goods are now the cushion. A retailer selling a television bought in February pays nothing extra at the till, however high the tariff on the next shipment.

Why the shelf price moves less

There is also a quieter piece of arithmetic that softens the blow. The duty is charged on the value declared at the border, which is the price the importer paid the foreign factory, and that is often a fraction of what the item sells for in the shop. Freight, warehousing, marketing, rent and the retailer's margin are all added on American soil. If a jacket's import cost is a third of its shelf price, a 30 per cent tariff passed on in full raises the shelf price by about a tenth.

That dilution explains why even complete pass-through would lift consumer prices less than the tariff rates suggest. It also means the effect shows up unevenly. Cheap goods with thin retail mark-ups, such as basic clothing, toys and household items, carry a larger share of import cost in their final price and will see bigger percentage rises than branded goods with heavy marketing costs.

Margins go first

Shoppers are also being choosy, so big retailers and consumer goods companies are for now paying part of the tariffs out of their own gross margins rather than risk losing market share. That can last only so long. As more expensive stock that has paid the tariff reaches warehouse shelves over the summer, companies will run out of room to absorb it.

The squeeze is already showing up. Producer price figures published this week showed the margins earned by wholesalers and retailers shrinking in April, which is what absorption looks like in the data. Walmart, the country's biggest retailer, warned this week that it would have to start raising some prices as goods that have paid the new duties arrive. When the company with the most bargaining power over suppliers says it cannot swallow the whole cost, smaller rivals will struggle even more.

What 2018 taught

The first trade war offers a guide to timing. Research on the tariffs of 2018 and 2019 found that the duties were passed almost entirely into the prices American importers paid, while shop prices rose more slowly and by less as retailers took part of the hit. Studies of the tariffs on washing machines found that prices of dryers rose too, although dryers were not taxed, because makers priced the two together. Pass-through was delayed and partial, but it came.

The strongest argument against the forecast is that the worst tariffs are already being cut. The truce with China announced this week lowers the American duty on Chinese goods from 145 per cent to 30 per cent, and weaker consumer demand could force companies to keep absorbing costs. That would shift the damage from prices to profits and, eventually, to jobs rather than remove it. A 30 per cent tariff on China plus a 10 per cent duty on most other countries is still far higher than anything retailers have had to pass on in decades.

Who feels it first

The burden will not fall evenly. Poorer households spend a larger share of their budgets on goods, and particularly on the cheap imported goods where tariffs bite hardest, while richer households spend more on services. Discount chains and dollar stores, whose customers are most sensitive to price, have the least room either to raise prices or to absorb costs. Households have noticed already: expectations of inflation in the year ahead, as measured by the University of Michigan's survey, have jumped to their highest in decades, even as the official figures stay calm.

Signs to watch

The Federal Reserve left its policy rate at 4.25-4.5 per cent last week, and said the risks of both higher unemployment and higher inflation had risen, which leaves it waiting on exactly this question. The monthly figures to watch are prices of core goods such as furniture, clothing, toys and electronics, the import price index and retailers' guidance on margins over the summer. The calm April figure reflects inventories bought before the tariffs, and consumer prices will probably start rising faster by late summer once that cheaper stock has been sold. The first clear evidence is likely in the June and July price reports, in goods such as toys and clothing, and it will land hardest on lower-income shoppers.