Consumers are paying the costs for Trump's tariffs: New York Fed

A recent New York Fed survey indicates that businesses in the New York and northern New Jersey region are largely passing on the costs of higher tariffs to consumers through increased prices. Approximately 75% of businesses facing tariff-induced cost increases in both manufacturing and service sectors have raised prices, with manufacturers reporting an average tariff rate of 35% and service firms 26%, representing increases of 25 and 17 percentage points respectively in the last six months. While firms have adjusted prices quickly, considerable uncertainty remains regarding the future direction of tariffs and their overall impact on businesses, particularly given policy shifts and court rulings.

Analysis

A recent Federal Reserve Bank of New York survey highlights a significant pass-through of tariff-related costs to consumers by businesses in the New York and northern New Jersey region. The survey, conducted May 2-9, found that approximately 90% of manufacturers and three-quarters of service firms import goods, with imported inputs averaging around 30% for all firms. Manufacturers reported an average tariff rate on imports of 35%, a substantial increase of 25 percentage points from six months prior, while service firms saw their average tariff rate rise by 17 percentage points to 26%. Crucially, about three-quarters of businesses in both sectors facing these tariff-induced cost increases passed at least some of these costs to customers via higher prices. Specifically, almost a third of manufacturers and 45% of service firms fully passed on tariff costs, while 45% of manufacturers and a third of service firms passed on a portion. These price adjustments occurred rapidly, with over half of firms raising prices within a month of the cost increases. Despite these actions, considerable uncertainty regarding the future trajectory of tariffs persists among businesses, with about half of service firms in early May expecting further increases and a third anticipating declines. This uncertainty is compounded by subsequent policy shifts, including a temporary reduction in some China tariffs and court rulings invalidating certain tariff measures, which occurred after the survey's conclusion, suggesting ongoing volatility in trade policy and its direct inflationary impact.

Key Decisions for Investors

• Investors should closely monitor companies' exposure to import tariffs and their ability to pass on increased costs, particularly in the manufacturing and service sectors.
• Given the reported pass-through of tariff costs, anticipate potential upward pressure on inflation and a corresponding impact on consumer discretionary spending.
• Actively track trade policy developments and legal challenges to tariffs, as these will directly influence input costs and business outlook, creating both risks and potential sector-specific opportunities.