The Diminishing Inflationary Impact of Tariffs and Its Implications for 2026 Equity and Commodity Markets

The relationship between tariffs and inflation has long been a contentious topic in economic policy. While tariffs are often framed as tools for protecting domestic industries, their inflationary consequences have been a focal point of debate. Recent data suggests, however, that the inflationary impact of tariffs may be diminishing, creating new opportunities for investors in 2026. As global trade policies evolve and businesses adapt to higher trade barriers, the pass-through of tariff costs to consumer prices appears to be slowing. This normalization of inflationary pressures, coupled with strategic shifts in equity and commodity markets, is opening doors for cyclical sectors poised to benefit from a rebalancing of global trade dynamics.

The Diminishing Inflationary Impact of Tariffs

Tariffs have historically contributed to inflation, particularly in durable goods such as vehicles, electronics, and furniture. According to a report by the St. Louis Fed, tariffs accounted for approximately 0.5 percentage points of headline PCE annualized inflation and 0.4 percentage points of core PCE inflation during the June–August 2025 period. However, the pass-through of these costs to consumers has been partial. By August 2025, only 35% of the model-predicted tariff effects had materialized in consumer prices, with businesses absorbing much of the remaining 65%. This trend aligns with findings from the Harvard Business School Pricing Lab, which noted that while import prices rose by 5% due to tariffs, domestic price increases remained below trend, suggesting that firms are delaying or limiting price hikes.

The partial pass-through reflects several factors. First, competitive pressures in certain sectors-such as retail and manufacturing-have constrained firms' ability to raise prices. Second, businesses are absorbing costs in the short term, particularly in industries where supply chains are still adjusting to new tariff regimes. Third, expectations of temporary tariffs may have reduced the urgency for price adjustments. For example, the Budget Lab at Yale estimated that 61–80% of new 2025 tariffs were passed through to consumer core goods prices in June alone, but this rate has since declined as businesses and consumers adapt.

2026 Outlook: Inflation Normalization and Cyclical Opportunities

As we approach 2026, the normalization of inflation and tariffs is expected to create favorable conditions for cyclical sectors. Central banks, including the Federal Reserve, are projected to continue rate cuts in response to easing inflation and resilient economic growth. This accommodative monetary policy will reduce borrowing costs, spurring investment in AI-driven industries and infrastructure projects. For instance, J.P. Morgan Global Research forecasts that AI-related capital expenditures will remain a key driver of earnings growth, with AI infrastructure-requiring inputs like copper, lithium, and rare earths-experiencing heightened demand.

The normalization of tariffs is also reshaping global trade flows. While U.S. tariffs on goods from China and other countries have contributed to supply shocks, the gradual easing of these policies in 2026 is expected to reduce overcapacity in certain regions and stabilize demand. For example, the removal of tariffs on green coffee has already stabilized pricing for coffee producers, with companies like J.M. Smucker absorbing $75 million in tariff-related costs to avoid further price hikes. Similarly, the EU's Carbon Border Adjustment Mechanism (CBAM) is anticipated to influence import costs for steel and fertilizers, creating opportunities for European producers to gain market share.

Strategic Entry Points in 2026

Investors seeking to capitalize on these trends should focus on sectors directly tied to AI infrastructure, commodities, and emerging markets.

1. AI Infrastructure and Technology Sectors: The AI supercycle is expected to drive demand for critical minerals such as copper, lithium, and rare earth elements. Vanguard predicts that AI will become the foundation for the next wave of economic progress, with S&P 500 companies in software, technology hardware, and semiconductors leading the charge. Hyperscalers like Amazon, Google, and Microsoft have already invested $400 billion in AI-related projects in 2025, and this momentum is likely to continue in 2026.

2. Commodities Linked to AI and Green Energy: The demand for commodities such as copper and lithium is being driven by both AI infrastructure and the green energy transition. Pimco highlights that copper, in particular, is a "must-have" for AI data centers and renewable energy systems, with global demand expected to outpace supply. Gold, meanwhile, remains a safe-haven asset amid geopolitical uncertainties, though its elevated valuation relative to real yields suggests caution for investors.

3. Emerging Markets and Trade Diversification: Emerging markets are positioned to benefit from trade normalization and AI-driven growth. For example, Japan's equity market is expected to thrive due to wage growth and a weaker yen, while European equities may gain from fiscal stimulus and rate cuts. In Asia, countries like Malaysia and Cambodia are restructuring supply chains to align with U.S. tariff policies, creating opportunities for manufacturers and agribusinesses.

4. Cyclical Sectors in Manufacturing and Agriculture: The normalization of tariffs is also expected to ease costs for manufacturers and agricultural producers. For instance, U.S. soybean exports may rebound as China diversifies its supply sources, while the automotive industry could see reduced costs if U.S. tariffs on European imports are adjusted.

Risks and Considerations

While the outlook for 2026 is optimistic, investors must remain mindful of risks. Geopolitical tensions, such as the U.S.-China trade dispute, could disrupt supply chains and reignite inflationary pressures. Additionally, the Supreme Court's review of the legality of Trump-era tariffs introduces uncertainty about future trade policies. Commodity markets, too, face headwinds from oversupply in energy sectors and carbon policy implementation.

Conclusion

The diminishing inflationary impact of tariffs and the normalization of global trade dynamics are creating strategic entry points for investors in 2026. Cyclical sectors tied to AI infrastructure, commodities, and emerging markets are particularly well-positioned to benefit from these shifts. However, success will require a nuanced understanding of macroeconomic trends and a willingness to adapt to evolving trade policies. As the OECD notes, the AI boom has already cushioned the blow of tariffs in 2025, but its long-term sustainability will depend on returns that justify the massive capital expenditures now underway. For investors, the key will be balancing optimism with caution, leveraging data-driven insights to navigate the opportunities and risks ahead.