Pass-Through

Real trade-weighted dollar depreciation of roughly 6.6% (Dec, log terms) combined with a rise in average effective tariff rates from ~2% to ~12% implies substantial import-price pressure: using a ~1/3 exchange-rate pass-through and near-100% tariff pass-through, a back-of-the-envelope calculation yields ~11.2% upward pressure on import prices (9% from tariffs + ~2.2% from FX). Ex-food/fuel import prices had only risen ~0.7% through November, but tariffs (and related wholesale markups) already contributed to a large December PPI jump; DB forecasts a further 6% dollar decline in 2026, which would add more inflationary pressure. Ongoing politically driven threats to trading partners add policy uncertainty and potential for further trade-action-driven price increases.

Analysis

Market structure: A combined near-100% tariff pass-through plus ~1/3 exchange-rate pass-through implies an ~11% effective shock to import prices (9% tariffs + ~2.2% FX) concentrated across consumer goods and intermediate inputs over 2025–26. Direct winners are domestic import-competing producers (steel, aluminum, domestic apparel, select machinery) and commodity exporters; losers are high-import-margin retailers, apparel/electronics brands, and offshore-heavy manufacturers whose gross margins will compress by multiple percentage points absent price increases.

Competitive dynamics & supply/demand: Higher effective import prices shift pricing power toward domestic producers and trigger inventory re-pricing — PPI jumps already suggest wholesale markup pass-through is underway with a 1–6 month lag into CPI. Expect demand erosion for discretionary goods if retailers pass through >50% of cost increases, while upstream materials demand can remain strong, tightening industrial metals and agricultural markets intermittently.

Cross-asset and macro risks: A weaker USD (DB forecast -6% in 2026) plus tariffs points to higher CPI risk (token estimate: tariffs could add ~0.8–1.5 percentage points to headline CPI over 12 months), pressuring long-duration bonds (10y yields bias higher), lifting TIPS real allocations, boosting gold and commodity prices, and raising equity volatility — particularly in retail/consumer discretionary and supply-chain exposed tech names.

Time horizons & catalysts: Immediate (days): FX/volatility spikes on tariff headlines; short-term (weeks–months): earnings revisions and margin guidance from import-reliant firms; long-term (quarters): Fed reaction function (risk of higher terminal rates) and any legal/political reversals. Key catalysts: CPI/PPI prints, Fed comments, tariff implementation updates, and pre-election policy shifts.

Key Decisions for Investors

• Establish a 3.5% pro-rata long in Materials: 2.5% XLB (Materials ETF) + 1.0% CLF (Cleveland-Cliffs) with a 3–9 month horizon; trim on +20% outperformance or if 10y real yields rise >75bp from current levels; hard stop -10%.
• Reduce exposure to import-heavy retail: initiate a 2% short via XRT (Retail ETF) or buy a 2% notional 3-month ATM put spread on TGT (Target) to hedge margin risk; unwind after two earnings releases or if tariffs are rolled back by >50% within 90 days.
• Inflation protection: allocate 3% to TIPS via TIP (iShares TIPS ETF) with 6–18 month horizon; add another 2% if monthly CPI prints >0.4% or annual CPI >4.0% to protect real returns against tariff-driven inflation.
• Commodity/FX hedge: take 3% gross exposure split 1.5% GLD (gold ETF) + 1.5% DBA (agriculture ETF) as insurance against USD weakness and commodity upside; implement 6–12 month horizon and exit if USD index rallies >3% within a 30-day window or if CPI surprises fall below consensus by >0.3pp.