U.S. prices not boosted by Trump's tariffs: Explanation provided

U.S. prices not boosted by Trump's tariffs: Explanation provided

In a surprising turn of events, despite fears of a fresh wave of inflation due to President Trump's tariffs, the prices of goods and services in the US have remained steadily reasonable. The Personal Consumption Expenditures Price Index, the Federal Reserve's preferred inflation indicator, rose by 2.3% in May, just slightly above the central bank's 2% annual target. The Consumer Price Index for the same month increased at an annual rate of 2.4%, less than economists had anticipated.

This mild inflation is attributed to inventive measures employed by some businesses to counteract the tariff's effects. For instance, they've pre-ordered inventory, absorbed some tariff costs to shield consumers from price hikes, and seized opportunities to dodge or delay tariff payments by exploiting loopholes.

"Businesses have shown an astonishing degree of creativity and resourcefulness in managing the initial shock," noted Gregory Daco, chief economist at EY-Parthenon, during discussions with our MoneyWatch team.

However, this doesn't necessarily imply that consumers and businesses are out of the woods. Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, believes that prices will inevitably rise as tariffs gradually push up import costs in the latter part of the year.

Here are three explanations illustrating why tariffs haven't sent inflation soaring, at least for the time being:

Proactive Stockpiling

Following the Trump administration's announcement of tariffs on numerous countries earlier this year, many companies hastily stocked up on products, parts, and imports. Truly, they aimed to preemptively import rapidly to avoid incurring additional tariff expenses.

"They stockpiled goods they needed and stored them in warehouses or on store shelves, serving as an initial line of defense against tariffs," Daco explained.

This excess inventory allows importers to postpone price increases.

"Many retailers pre-ordered inventory before the tariffs took effect, so the inventory they're selling hasn't been marked up yet," Goldberg added.

Prudent Wait-and-See approach

Some businesses, faced with higher tariffs, choose to defer passing any cost increases to consumers as they wait for clarity on U.S. trade policy.

The Trump administration temporarily froze most of its tariffs for 90 days to allow time for negotiations, with this moratorium expected to expire on July 9. Moreover, after announcing tariffs of up to 145% on Chinese imports earlier in the year, Mr. Trump and Chinese officials recently declared a framework for a trade deal.

"Given the erratic nature of tariff policy over the past five months, companies that sell tariff-affected items may exercise caution about raising prices immediately," Charley Ballard, professor of economics emeritus at Michigan State University, stated during our MoneyWatch conversations.

Companies are often reluctant to boost prices to avoid alienating consumers and losing market share to competitors.

"To put it simply, some businesses opted not to pass on the costs right away. They decided, 'Let's see if we can hold out for a while, delay some imports, use the existing inventory and devise a sounder pricing strategy'," Daco commented further.

Although tariffs are ultimately paid by importers, who typically transfer these costs to consumers, some foreign exporters have also been willing to bear the brunt of these charges.

Lower Tariff Costs

Despite Mr. Trump announcing steep tariff rates, the actual duties collected at U.S. borders have so far been lower than the official rates. This is because some importers have been able to circumvent the levies by storing their goods in bonded warehouses or foreign trade zones.

Companies can employ bonded warehouses, usually situated near commercial ports, to temporarily store goods, components, and other inputs tariff-free.

"If you make use of a warehouse or foreign trade zone, you can postpone the payment of tariffs until these goods are put into commerce," Daco clarified. "This creates a sort of tariff-free zone."

Additionally, the U.S. has implemented a multitude of tariff exemptions and exclusions, which in practice have resulted in actual tariff rates on imports being lower than the nominal rates initially declared by the White House.

As of June, the effective U.S. tariff rate on all imports hovered around 10%, compared to an official average tariff rate of 15%.

Nevertheless, businesses cannot hold the line on price hikes indefinitely if tariffs remain elevated, experts caution. Federal Reserve Chair Jerome Powell told lawmakers this week that tariffs could yet instigate higher inflation, with this spike likely to occur this summer.

1. Businesses have pre-ordered inventory before tariffs took effect, preventing the need to immediately increase prices due to the additional cost caused by the tariffs.
2. Some companies have delayed passing on cost increases to consumers, choosing instead to adopt a wait-and-see approach as they wait for clarity on U.S. trade policy.
3. The use of bonded warehouses and foreign trade zones by importers has allowed them to postpone the payment of tariffs, resulting in actual tariff rates on imports being lower than the official rates initially announced.

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