The US Consumer Price Index rose 0.3%, as expected, in June. Excluding food and energy prices, the CPI rose 0.2% (0.23% unrounded), less than the expected 0.3%. While these increases were larger than in May, pushed up year-over-year inflation measures, and still are inconsistent with the Federal Reserve’s 2% target for inflation, they were less than feared by those who expected President Trump’s tariffs to push up measured inflation. The Producer Price Index was even lower compared with expectations. The PPI was unchanged, with and without food and energy prices, vs. expectations of 0.2% increases (see line graph below). On the surface, tariffs seem to have had little impact on inflation so far. Why is that?

Inventory of goods

First, the broadest tariffs didn’t take effect until April 5, and imported goods that were “on the water” before April 5 did not incur these tariffs. American businesses anticipated these tariffs and greatly boosted imports before the tariffs took effect. This shows up in both imports of goods, up 56.1% (!) at an annual rate in the first quarter, and the change in private inventories, which hit a three-year high in the first quarter.

American businesses don’t seem to have raised prices on goods that did not incur the tariffs, even if profit-maximizing prices should reflect replacement costs. (LIFO rather than FIFO for you accountants.) If this is the reason prices haven’t risen more, prices will increase significantly once inventories of goods imported before tariffs took effect have been worked off.

Who bears the burden?

Another possibility is that foreign exporters are bearing more of the burden of tariffs than economists expected. A recent study by Goldman-Sachs suggests that exporters would bear about 15% of the tariffs, through reduced prices; US businesses would bear another 15%, through reduced profit margins; and 70% would be borne by US consumers, through higher prices. Most previous studies, including some focused on the tariffs from President Trump’s first term, show that foreign exporters bear even less of the tariffs, while American businesses and consumers bear nearly the entire burden of the tariffs.

However, the Trump administration would disagree and argue that foreign exporters bear much of the burden of the tariffs. That could be the case if government-owned or -controlled businesses are run to maximize employment rather than maximizing profits as in economics textbooks. Such businesses would cut prices of exports enough to prevent a decline in production and employment. To the extent foreign exporters bear more of the burden of tariffs than economists predict, US prices will increase less than they expect.

Offsetting declines

A third possibility is that prices are going up because of tariffs, but that these increases are being offset by declines in other prices. A closer inspection of the CPI report shows this to be the case. There were big increases in the prices of many goods that largely are imported. The CPI for men’s shirts and sweaters rose 4.3% in June. The CPI for women’s dresses rose 3.9%. Prices of household furnishings and supplies rose 1.0%, with prices of linens other than floor and window coverings rising 5.5%. The CPI for toys rose 1.8% after rising 1.3% in May. Prices of computers rose 1.4%. And prices of major appliances rose 1.9% after rising 4.3% in May and 1.3% in April. Prices of imported appliances are affected directly by tariffs on appliances. Prices of domestic appliances are being boosted by tariffs on steel and aluminum, with further boosts from tariffs on copper still to come.

Core (excluding food and energy) goods prices rose 0.2% overall. That doesn’t seem like much, but it’s up from an average monthly increase of 0.07% over the prior six months. The Producer Price Index for finished goods, excluding food and energy, my favorite measure of underlying inflation, rose 0.3% for a third straight month in June. Prices of imported foods also seem to be rising because of tariffs. Prices of fresh fruits and vegetables rose 1.0% in June; frozen fruits and vegetables rose 1.2%. Foods imported from Canada and Mexico largely are exempt from tariffs, but most foods imported from South and Central America are not.

Foreign tourists are M.I.A.

The big increases in prices of these goods largely were offset by declines in prices for hotel rooms, down 3.6%, and in airline fares, down just 0.1% but after big declines in the prior two months. The standard story is that because consumers are spending more money on goods, they have less to spend on discretionary services, like travel. That might be part of it, but I think the demand for hotels and airline travel is down because foreigners, especially Canadians, are not traveling to the United States because they are angry at some of President Trump’s statements.

Prices of new (-0.3%) and used (-0.7%) vehicles also were down in June, surprisingly given tariffs on vehicles, steel and aluminum. Vehicle sales have declined after the rush to buy before tariffs raised prices. The seasonally adjusted annual rate of light vehicle sales surged to 17.8 million in March, stayed at a strong 17.3 million in April, and then fell to 15.6 million in May and 15.3 million in June. The drop in demand after the pre-tariff rush is making it harder for dealers to raise prices. Manufacturers and dealers won’t be able to hold prices down once they’ve sold the vehicles they imported before tariffs took effect. Prices will rise sharply, putting further downward pressure on sales.

Is growth slowing?

A final possibility is that slowing growth, beyond the softness in travel and vehicles, is putting downward pressure on prices, offsetting the upward pressure from tariffs (see line graph above). Most data don’t support this explanation. Nonfarm payrolls rose by 147,000 in June, and the unemployment rate edged down to 4.1%. Retail sales surged 0.6% vs. expectations of a 0.1% increase. Industrial production in US manufacturing rose 0.1%, and May’s increase was revised up from 0.1% to 0.3%. (Production of primary metals, aided by tariffs on steel and aluminum, surged, but production of motor vehicles and electrical equipment, hurt by those tariffs, fell.)

But there are clouds. Real disposable personal income fell 0.7% in May, the biggest decline since January 2022. Real average weekly earnings declined 0.4% in June, as prices rose more than wages and the average workweek fell. And even after the big June increase, retail sales were below their March peak.

Higher prices are almost inevitable

So, where do I come down on the various explanations for why prices and measured inflation haven’t risen more because of tariffs? I think the biggest reason is that US businesses have not raised prices on goods imported before tariffs took effect, probably because they were afraid that populist politicians on the left and right would criticize such increases as unjustified. Once inventories of untariffed goods have been depleted, prices will rise, and economic growth will slow.

While I’m open to the possibility that exporters in centrally planned economies (e.g., China and Vietnam) might cut prices of exports to maintain employment, it’s hard to believe that profit-maximizing exporters in market economies will bear much of the burden of tariffs. Americans will bear most of the burden. Tariffs don’t seem to have had a big impact on broad measures of inflation and economic growth so far, but they probably will in coming months.   

Robert C. Fry, Jr., Ph.D.
Chief Economist, Robert Fry Economics LLC
302-743-8553
RobertFryEconomics@gmail.com,
www.linkedin.com/in/robertcfryjr