Tarifflation remains elusive
If the warnings about tarifflation were valid, we should have seen signs by now.
The recent inflation report from April, reflecting consumer sentiment in the US, indicates that President Trump is implementing new tariffs. These tariffs took effect on April 2, imposing a blanket 10% on imports, with even higher rates for various countries.
But so far, no signs of tarifflation have emerged.
Wall Street analysts anticipated the consumer price index would rise by 0.3%, but it only increased by 0.2%. February’s rise was also just 0.2%, following a dip in March. On a three-month annualized basis, inflation sits at about 1.2%.
The producer price index (PPI) for final demand was projected to grow by 0.2%, yet the Labor Department reported a surprising 0.5% drop in April, marking the sharpest decrease since the onset of the pandemic. Core PPI, which excludes food, energy, and trade services, fell by 0.1%. It’s significant because this marks the first monthly decline in five years, with overall final product prices remaining flat. Both energy and food prices have decreased.
If tariffs were instigating a fresh wave of inflation, it appears those in charge of pricing may have overlooked informing businesses that consumers would pay more.
Profit Margins Reflect Business Absorption of Tariffs
A notable factor in the decline is the 1.6% reduction in the Final Demand Trade Services margin, which measures the markup applied by retailers and wholesalers rather than the prices of goods themselves. This is crucial because it indicates that businesses are absorbing additional costs rather than passing them along to consumers.
PPI functions differently from CPI. While CPI tracks the consumer prices at checkout, PPI focuses on trade margins and measures the profits of wholesalers and retailers derived from reselling products, calculated as the difference between what they sell an item for and what they paid for it. This is particularly relevant for retail and wholesale service prices.
If tariffs are being passed on to consumers, I would have expected trade margins to hold steady or even increase. Instead, they’ve declined.
More than 40% of the April service decline stemmed from falling margins in machinery and vehicle wholesale, dropping below 6.1%, which are sectors directly influenced by tariffs.
Other significant factors decreasing margins included wholesalers for food and alcohol, as well as airline services. The widespread margin pressure suggests that businesses are unlikely to increase prices to offset tariff costs.
In essence, it’s clear: Companies are feeling the squeeze, not consumers.
Tariff Impact Extends Beyond Initial Pricing
Signs of price increases due to tariffs are becoming more visible along the production chain. The PPI for intermediate demand, which tracks what businesses pay during production, shows substantial price increases for key industrial metals. For instance, steel mill products rose by 5.9%, and nonferrous metal ores saw a 7.5% jump. Additionally, prices for non-ferrous wires and cables went up by 3.7%. Cold roll steel climbed by 9.4%.
These specific goods are most sensitive to the steel and aluminum tariffs under Section 232, hinting at cost pressures at the input level. However, the key takeaway is that these pressures are not translating to higher consumer prices.
Despite rising metal costs, final commodity pricing remains unchanged, as retailers compress margins to avoid passing costs to consumers. This phenomenon is evident even within interim demand. Prices for metal products were significantly lower than the metal costs itself. This indicates that tariff pressures are being absorbed rather than passed on.
The narrative of tarifflation might begin in the metal market, but it halts at the warehouse threshold.
It’s About Margin Compression, Not Inflation
This reinforces the points we’ve been emphasizing. Tariffs don’t automatically trigger inflation. While a common concern voiced by economists, it’s more of a theoretical fear than an observable reality.
Sure, tariffs can escalate import costs. Yet, whether these costs are transferred to consumers depends largely on market competition, consumer behavior, and business strategies. Right now, we see little evidence of direct price pass-through. Instead, the focus is on margin compression.
This was already evident in April’s CPI, where product inflation was nearly flat. Categories like apparel and tableware, heavily influenced by trade, have seen minimal price increases. Jewelry and watch prices, often reliant on imports from various tariff-affected countries, rose only 1.9%. The costs of new cars remained stable. April’s PPI reinforces this trend.
The major critique of Trump’s tariff policy has continuously been inflation. Many claimed it would hit consumers like a covert tax. Kamala Harris repeatedly referred to it as a national sales tax.
However, both CPI and PPI data indicate the opposite. Prices have stayed stable, service rates have softened, and margins are shrinking. It’s not driving inflation – it’s being absorbed.
This doesn’t imply that tariffs are without consequences. Reduced margins can lead to job losses, postponed investments, and cautious pricing strategies. Yet, it presents a distinctly different macroeconomic narrative than what alarmists about tariffs have conveyed. We can also consider the possibility to lower other business costs, including regulatory and tax burdens.
While tariffs remain, we might eventually observe price increases linked to tariffs that will reach consumers. However, these could be isolated adjustments counterbalances elsewhere in the market, rather than sustained hikes across the board.
