Impact of Tariffs on US Consumers and Inflation
According to a recent report from economists at Goldman Sachs, US consumers are poised to experience the full effects of President Trump’s tariffs once these taxes are eliminated.
Up until now, most of the tariffs have been shouldered by businesses, which has, in a way, kept prices at bay for consumers. Jan Hatzius and other economists have suggested that while consumers have only felt about 22% of tariff costs up until June, that figure is expected to rise sharply to around 67% as more US companies start increasing their prices.
On the business side, US companies have taken on roughly 64% of the tariffs, but this share is expected to drop to less than 10%, according to the report.
Interestingly, foreign exporters covered about 14% of tariff costs as of June, with that number potentially increasing to 25% in the future.
Goldman’s economists anticipate a quicker rise in inflation, predicting that the Core PCE—a key measure favored by the Federal Reserve—could reach 3.2% year-on-year by December. In fact, the foundational inflation attributed to tariffs stands at around 2.4% currently.
For perspective, the Core PCE, which deliberately excludes fluctuating food and energy prices, increased to 2.8% in June—higher than what many expected.
What’s more, even local producers not directly impacted by additional tariff costs seem to be capitalizing on the situation, enjoying increased profit margins while hiking prices further, contributing to overall inflation.
Trump’s fluctuating stance on tariffs and the resulting impact on inflation have led the Federal Reserve to adopt a rather hesitant approach. Rates have remained unchanged at 4.25% to 4.5% since December.
Meanwhile, Trump has intensified his pressure on Fed Chair Jerome Powell, suggesting it’s time for immediate cuts.
Adding to the mix, Trump aims to nominate Stephen Miran, a known ally, to a recently vacated position on the board following Governor Adrianna Kugler’s resignation. Miran has been vocal in criticizing central bankers.
Current projections from CME FedWatch show that the likelihood of a quarter-point interest rate cut during the Fed’s September meeting exceeds 85%.
The upcoming Consumer Price Index for July, set to be released on Tuesday morning, will provide more clarity on how tariffs are influencing inflation.
Goldman Sachs estimates that tariffs have thus far contributed an increase of 0.2% to the Core PCE until June, with an additional 0.16% expected in July and a further 0.5% for the remainder of the year.
