Businesses Absorb Tariff Costs, Impact on Inflation Shows Mixed Signals
Recent data indicates that instead of increasing consumer prices, American businesses are absorbing the higher costs associated with tariffs. This development may suggest that the Federal Reserve ought to prioritize labor market support over other concerns.
The Purchasing Manager Index for September, provided by S&P Global, revealed that companies in both manufacturing and services sectors faced notable increases in input costs due to tariffs. However, the combination of weak demand and strong competition has largely prevented price hikes, resulting in inflation that marks the weakest commodities since January.
“Taxes have again been mentioned as a contributor to higher input costs in manufacturing and services, but fewer companies are able to pass these costs onto customers, which might suggest tightening margins, though there’s still a readiness to tackle inflation,” noted one industry analyst.
The combined output index, which merges service and manufacturing PMI, declined from 54.6 in August to 53.6 in September. Although a figure above 50 indicates growth, this represents a second consecutive month of deceleration. The service PMI decreased to 53.9, slightly exceeding expectations but falling from its summer pace, while production dipped to 52.0, down from recent highs. S&P Global estimates an annual economic growth rate of around 2.2% for the third quarter.
“The growth in September is good but seems to have slowed from the peak we saw in July,” commented Williamson. He further observed signs of job reductions among companies during September.
Comments from Federal Reserve officials resonate with this outlook on the economy. For instance, St. Louis Federal President Alberto Mu Salem noted that the tariffs’ impact is less than anticipated, indicating other factors may be driving inflation beyond the target. He also mentioned that it might take businesses three to six months to adjust to the tariffs, and only four months have passed since their imposition under the Trump administration.
“Producers of intermediate goods reportedly are fully passing tariffs onto customers through price increases and surcharges, yet businesses closer to the final consumer seem unable to do so,” Mu Salem elaborated.
Recently confirmed Fed Governor Stephen Milan highlighted in a speech that economists and policymakers may be overestimating the inflationary consequences of tariffs. He argued, “The minor price changes in some products have led to what I find to be an excessive level of concern.” Milan also pointed out that tariff revenues significantly help reduce the federal deficit, contributing to a considerable shift in the balance of lendable funds.
Superintendent Michelle W. Bowman stated that a decline in employment has contributed to easing price pressures. She noted that employment growth has stagnated and unemployment is beginning to rise. According to her, wage growth suggests that the labor market is not currently fueling inflation at a rate compatible with the 2% target.
Bowman indicated that inflation, excluding tariff effects, remains “well above target.” As trade policies stabilize, she posited that tariffs will likely have a minimal, short-term impact on future inflation.
The survey also uncovered warning signs about the economy, indicating that monetary policy may dampen demand and jeopardize growth. Factories reported a historically large backlog of unsold goods, weakened export orders, and slower employment growth in both the services and manufacturing sectors.
Still, there is evidence of improved business sentiment, as companies hope that recent rate cuts by the Fed could mitigate the economic challenges posed by uncertainties in trade policy.
