Tariffs Bring $100 Billion But Inflation Remains Modest At 2.4%

Economists have been warning for months that tariffs would lead to an inflation surge, but as of July, there is little evidence of this in economic data, despite the Treasury having collected about $100 billion in tariffs. The reasons for this discrepancy range from the idea that it is too soon to see the effects to the notion that consumers will not tolerate higher prices.

Since the beginning of President Donald Trump’s second term, there have been warnings from mainstream economists that prices would surge due to tariffs. The consensus has been that a tariff is essentially a tax on consumers, with businesses also indicating that they plan to pass on some of the tariff costs to customers. However, halfway through the year, there is no clear evidence of tariff-fueled inflation.

The tariffs are indeed in place, with the Treasury having collected a record-setting $100 billion in customs duties and on track to collect $300 billion this year. These tariffs are paid by U.S. importers when goods cross the border into the U.S. and eventually get passed on to consumers, influencing overall price levels in inflation measures. However, the inflation numbers do not reflect this expected impact. Official inflation readings from the Bureau of Labor Statistics have come in under expectations, with the latest reading being a relatively modest 2.4%. The president’s Council of Economic Advisers (CEA) has argued that import prices have actually been falling.

One possible explanation for the lack of tariff impact in the data is that the timeframe used to draw conclusions is too short. Tariffs on steel and aluminum went into effect in March and increased in June, while Chinese imports have been subject to a 30% tax since March. Official government price data takes time to collect and release, and as of mid-July, the most recent data covers May.

Another factor is that big businesses have been stockpiling inventory immediately after tariffs were announced. This surge means that businesses could still be selling goods brought in under pre-tariff prices. Eric Winograd, chief U.S. economist at AllianceBernstein, explained that businesses are sitting on inventory and have not yet had to raise prices on goods because they are still selling pre-tariff stock.

Uncertainty is also a significant factor. Business owners price their goods at replacement cost, but the uncertainty surrounding the exact increase in the price of replacement goods is keeping many firms from repricing their goods. Eugenio Aleman, chief economist at Raymond James, noted that while everyone knows the prices that firms will pay for replacement goods will be higher, nobody knows by how much, leading to a delay in repricing.

Businesses, particularly small businesses, could be choosing to absorb the cost of tariffs for the time being. Small firms may be reluctant to hike prices due to their smaller client base and limited access to capital. Recent Commerce Department figures showing growth in proprietors’ income flatlining in May could indicate this possibility. However, more data would be needed to confirm this trend.

An additional factor is the influence of the president’s public statements. The president has used his platform to discourage retailers from hiking costs, which could be deterring businesses from passing on tariff costs to consumers. Jeff Klingelhofer, a managing director at Aristotle Pacific, suggested that companies might be taking the brunt of the tariff impact because they are the only ones who can afford to, with consumers being “tapped out” after years of high inflation.

Consumers may also be less willing to pay higher costs due to the economic conditions. Former Federal Reserve economist Claudia Sahm noted that companies today are less quick to hike prices now than they were during pandemic inflation, when Americans were flush with cash and eager to spend it. Three years later, Americans have spent all the excess savings accumulated during Covid, and businesses realize that if they increase prices dramatically, they could be losing customers.

Some economists suggest that inflation might never come. Mark DiPlacido, policy advisor at American Compass, noted that foreign exporters have ended up absorbing a lot of the costs, and businesses have passed very little of it on to consumers. Japanese carmakers, for example, are slashing prices to compensate for the added costs U.S. buyers will pay. Every economist spoke with made some version of this point—that a tariff sets off a complicated negotiation between importers, exporters, and American end buyers, with the final answer being very specific to the business, the industry, and the general macroeconomic conditions.