Tariffs' Impact on Inflation Delayed by Business Strategies

Despite the implementation of tariffs by the Trump administration, the prices of goods and services in the United States have remained relatively stable. This stability is attributed to short-term measures taken by businesses to mitigate the impact of the tariffs, such as stockpiling inventory in advance, absorbing part of the tariff costs, and delaying or reducing tariff payments.

Experts warn that if the tariffs continue, the situation could change. The Personal Consumption Expenditures (PCE) price index, a key inflation indicator favored by the Federal Reserve, rose 2.3% year-over-year in May, slightly above the Fed's 2% inflation target. The Consumer Price Index (CPI) for May showed a year-over-year growth rate of 2.4%, lower than economists' expectations. This subdued inflation data reflects some companies' short-term measures to offset the impact of tariffs, such as increasing inventory in advance, absorbing part of the tariff costs to buffer consumers from price increases, and utilizing loopholes to delay or reduce tariff payments.

The chief economist at the management consulting firm, noted that many companies have been creative and strategic in buffering the initial impact of the tariffs. However, this does not mean that consumers and businesses, who have already faced the highest inflation in decades during the pandemic, are out of the woods. The head of U.S. rate strategy at TD Securities, believes that as tariffs gradually increase import costs in the second half of the year, prices may rise.

There are three main reasons why tariffs have not yet driven up inflation:

1. Advance Inventory Stockpiling: Before the implementation of the Trump tariffs, many companies began stockpiling or purchasing goods in advance to avoid additional tariff costs. The chief economist at the management consulting firm, explained that companies tried to stock up before the tariffs were implemented, buying and storing the goods they needed. This strategy has helped to delay price increases.

2. Waiting for Clarity: Some companies facing higher tariffs have chosen to delay passing on cost increases to consumers, waiting for the uncertainty surrounding U.S. trade policy to clear. In April, Trump announced a 90-day tariff suspension to allow countries time for trade negotiations, which is set to expire on July 9. An economics professor emeritus at Michigan State University, noted that the high level of uncertainty has made companies cautious about raising prices immediately.

3. Reducing Tariff Costs: Despite the high tariff rates announced by Trump in April, the actual tariffs collected by U.S. Customs have been lower than the official rates. This is because some importers have been able to avoid tariffs by storing goods in bonded warehouses or foreign trade zones. The chief economist at the management consulting firm, explained that companies can use these warehouses, typically located near major commercial ports, to temporarily store goods without immediately paying tariffs or taxes.

However, experts warn that if tariffs remain high, companies cannot indefinitely delay price increases. Federal Reserve Chairman recently stated that tariffs could lead to higher inflation, possibly starting this summer. The global macro strategy head at TD Securities, noted that the phased implementation of tariffs means that the full impact on prices will take time to materialize. He expects to see more price increases in July.