These researchers are tracking the impact of tariffs on prices in real-time. Here's how retailers are responding.

A recent study by Harvard Business School researchers using real-time data from four large U.S. retailers indicates that tariffs are contributing to rising consumer prices, impacting both imported and domestic goods, with price increases more pronounced in March than immediately following tariff announcements. The research, which utilizes AI to classify product origins, reveals that price hikes for Chinese goods are larger and more persistent compared to those from Canada and Mexico, mirroring patterns observed during the 2018-2019 trade tensions, suggesting retailers may be quickly reacting to tariff shocks.

Analysis

Recent research employing real-time data scraping from four large U.S. retailers and generative AI for product classification (achieving 85-88% accuracy) indicates that tariffs are exerting upward pressure on consumer prices for both imported and domestic goods. Notably, price increases were more significant in March than immediately following the April 2 tariff announcements, though prices continued to rise thereafter, with a brief moderation after the May 12 U.S.-China trade truce. The study, conducted by Harvard Business School professor Alberto Cavallo and his team, finds that domestic product prices are also increasing, likely due to higher costs of imported inputs and anticipated shifts in domestic demand. Furthermore, price increases on goods originating from China have been observed to be larger and more persistent compared to those from Canada and Mexico. These patterns mirror those seen during the 2018-2019 trade tensions, where retailers employed strategies like margin reduction, inventory front-loading, and trade diversion to mitigate the immediate impact on retail prices. While retailers may be prepared for rapid adjustments to current tariff shocks, the uncertainty regarding the persistence and scope of these measures is likely tempering the initial magnitude of their pricing responses. The official Labor Department consumer price data, due for release on Wednesday, will provide further insight into these inflationary trends.

Key Decisions for Investors

• Investors should closely monitor upcoming official inflation data, as real-time indicators suggest persistent tariff-driven price increases impacting both imported and domestic goods, which carries a moderately negative sentiment and uncertain outlook.
• Evaluate retailers' exposure to margin compression, as they may absorb some tariff costs or face reduced consumer demand if price hikes are fully passed on; companies with strong pricing power or diversified sourcing strategies may be better positioned.
• Assess portfolio companies for their reliance on Chinese imports, which are experiencing larger and more persistent price increases, and scrutinize the resilience and flexibility of their supply chains in response to ongoing trade policy shifts.
• Given the prevailing uncertainty surrounding the scope and duration of trade measures, anticipate potential market volatility in affected sectors and consider strategies that account for ongoing adjustments in trade dynamics and their impact on corporate costs.