Deutsche Bank: 75% of first-round tariffs already reflected in consumer prices

Deutsche Bank economists estimate that 75% of the first-round tariff impact has already been reflected in US consumer prices, contributing approximately 30 basis points to the overall core PCE level, primarily through high import share goods. They project that the first round of tariffs could add up to another 30 basis points to core PCE, with the August round of tariffs potentially adding an additional 40 basis points to the core PCE price level, signaling continued upward pressure on inflation from tariffs.

Analysis

According to Deutsche Bank's analysis, approximately 75% of the first round of tariffs has already been absorbed into US consumer prices for high-import-share goods, contributing a 30-basis-point increase to the overall core PCE level as of July. This impact has been concentrated in categories representing 23% of the core PCE index. However, the analysis highlights significant latent inflationary pressure, identifying that categories such as new vehicles and apparel have not yet reflected these cost increases. The report quantifies a potential further impact of up to 30 basis points on core PCE from the complete passthrough of the first tariff round, with an additional, more substantial 40 basis points of upward pressure anticipated from the subsequent August tariffs. This suggests a cumulative upside risk to core inflation that has not yet materialized in the official data, pointing toward sustained, tariff-driven price pressures in the near term.

Key Decisions for Investors

• Investors should anticipate continued upward pressure on core PCE inflation, potentially factoring in a more hawkish Federal Reserve stance as the full impact of tariffs, estimated at up to 70 additional basis points, materializes in the data.
• Portfolio managers should scrutinize holdings in consumer discretionary sectors, particularly new vehicles and apparel, which face future margin compression or demand destruction as they have not yet fully passed on tariff-related costs.
• Consider adjusting asset allocation to favor inflation-resilient sectors and reduce exposure to long-duration fixed-income securities, which are sensitive to unexpected increases in inflation and interest rate expectations.