NY Fed survey: Last month most firms passed on some of tariff surge

A New York Fed survey indicated that most firms in its district passed on at least some of President Trump's tariffs to customers in May, with nearly a third of manufacturers and 45% of service firms fully passing along tariff-induced cost increases by raising prices. Conducted between May 2 and May 9 when tariffs on China surged, the survey also revealed considerable uncertainty among businesses regarding the future path of tariffs and the appropriate pricing strategies, with many struggling to understand the level of tariffs affecting them. While economists expect tariffs to drive up inflation while lowering growth and employment this year, the persistence of these effects remains uncertain.

Analysis

A New York Federal Reserve survey conducted between May 2 and May 9 indicates that a majority of businesses in its district passed on at least some of the recently escalated tariff costs to customers. Notably, nearly one-third of manufacturers and approximately 45% of service firms reported fully transferring tariff-induced cost increases by raising prices, while roughly three-quarters of all firms implemented some form of price hike related to tariffs. At the time, surveyed factory firms estimated an average tariff level of 35%, reporting a 20% price increase on affected goods, while service firms faced an estimated 26% tariff level and passed on a 15% price increase. The report underscores significant business uncertainty regarding the future path of tariffs and challenges in determining appropriate pricing strategies, with a notable portion of firms also raising prices on goods not directly impacted by tariffs. These findings point towards potential inflationary pressures and a drag on economic growth and employment, consistent with prevailing economist and Federal Reserve views, although the durability of such inflation remains an open question.

Key Decisions for Investors

• Investors should monitor leading inflation indicators and companies' pricing power, as widespread tariff pass-through could accelerate inflation and influence monetary policy decisions.
• Assess portfolio exposure to sectors heavily reliant on international supply chains or those with limited ability to absorb or pass on tariff-related cost increases, as these may face margin pressure.
• Given the "considerable uncertainty" highlighted by businesses regarding future tariffs and pricing, investors should factor in potential market volatility stemming from ongoing trade policy developments.