Tariffs are expected to start showing up more in consumer prices as holiday shopping season starts

Tariffs are increasingly impacting consumer prices, with Bank of America estimating they add approximately 0.5 percentage points to core PCE, keeping inflation elevated at around 2.9% compared to a potential 2.4% without them. This persistent inflationary pressure is significant for the Federal Reserve, which targets 2% core inflation, and has already seen dissent on recent rate decisions. Companies are passing 50-70% of tariff costs to consumers, affecting prices for various goods and potentially influencing consumer confidence and spending patterns, especially heading into the holiday season, with some estimates suggesting increased reliance on credit for purchases.

Analysis

Tariffs are significantly contributing to elevated inflation, with Bank of America estimating they add approximately 0.5 percentage points to the core Personal Consumption Expenditures (PCE) index. This implies that without tariffs, the September core PCE rate would be closer to 2.4% instead of the reported 2.9%, a notable deviation from the Federal Reserve's 2% target. This persistent upward pressure has already led to dissent among Fed officials regarding recent interest rate decisions.

A substantial portion of these tariff costs, estimated at 50%-70%, is being passed directly to consumers, impacting prices for everyday goods such as clothing, which saw a 0.7% jump in September. This direct burden on frequently purchased items is likely to shape consumer perceptions of inflation, potentially creating a self-reinforcing cycle despite these items having minor weight in overall price indexes.

The upcoming holiday shopping season is particularly vulnerable, with high-tariff seasonal goods like artificial Christmas trees influencing consumer sentiment. LendingTree estimates suggest that if current duties were in place for the 2024 holiday season, shoppers would have faced an additional $40.6 billion in costs. This could compel more consumers to rely on credit cards and personal loans, adding an estimated $132 per shopper in tariff costs.

Key Decisions for Investors

• Investors should closely monitor core inflation metrics, particularly PCE, for signs of sustained tariff-driven elevation, which could influence Federal Reserve monetary policy decisions and interest rate outlook.
• Evaluate consumer discretionary spending and retail sector performance, as higher tariff-induced prices and potential reliance on credit may dampen demand and compress margins for companies unable to fully pass on costs.
• Assess the credit quality of consumer-facing lenders and credit card companies, given the increased likelihood of consumers utilizing credit to offset higher holiday season expenses.