Businesses are raising prices after tariffs — even on unaffected goods

A New York Federal Reserve survey indicates businesses are raising prices on goods and services even when unaffected by tariffs, suggesting companies may be exploiting the current environment to expand profit margins. The survey of manufacturers and service firms in the New York and New Jersey area revealed that a significant portion are passing along tariff costs to consumers, with many also increasing prices on non-tariffed items. This behavior echoes trends observed during the Trump administration's tariff implementations and raises concerns about potential price gouging amid ongoing trade uncertainties, as manufacturers reported average tariff rates up 25 percentage points in the last six months.

Analysis

A Federal Reserve Bank of New York survey from early May reveals that businesses are not only passing through direct tariff-related cost increases but are also raising prices on goods and services unaffected by these levies. This behavior, reported by a "significant share" of the surveyed 110 manufacturers and over 200 service firms in the New York/New Jersey area, suggests companies may be opportunistically expanding profit margins by leveraging customer expectations of rising prices, a phenomenon reminiscent of the "taking price" discussions during 2022's high inflation and observed previously when tariffs on washing machines led to price hikes for dryers. While approximately three-quarters of firms acknowledged passing on tariff costs, and manufacturers reported their average paid tariff rate surged by 25 percentage points to 35% in six months (service firms saw a 17 percentage point rise to 26%), the price increases on non-tariffed items indicate a broader inflationary pressure. This situation has contributed to decreased bottom lines for about half of the companies and some workforce reductions, all amidst high operational uncertainty due to the volatile tariff environment. Although a regional survey, its authors suggest these trends could be indicative of nationwide dynamics, aligning with the provided strongly negative sentiment and pessimistic tone regarding the economic outlook.

Key Decisions for Investors

• Investors should meticulously scrutinize upcoming inflation data and corporate earnings reports for evidence of widespread opportunistic pricing beyond direct cost pass-through, as this could signal more persistent inflationary pressures.
• Consider overweighting investments in companies and sectors demonstrating strong pricing power or providing essential goods and services, as these may prove more resilient if businesses broadly use tariffs as a pretext for wider price increases.
• Exercise caution with companies heavily exposed to discretionary consumer spending or operating in industries with low competitive moats, as they may face margin compression or demand destruction if such opportunistic pricing becomes pervasive and proves unsustainable.