Companies could 'take advantage' and raise prices as tariff story plays out, UBS economist says

UBS economist Paul Donovan suggests that President Trump's tariff plan could enable corporations to easily raise prices on durable goods. This is primarily due to consumers' limited recall of past prices for long-lasting items and the prevailing post-pandemic inflation environment, which has conditioned consumers to view price increases as more inevitable. Consequently, companies may leverage this perception to pass through higher costs with reduced consumer backlash, effectively increasing their pricing power.

Analysis

According to analysis from UBS economist Paul Donovan, President Trump's proposed tariffs may provide corporations with a strategic opportunity to increase prices, particularly on imported durable goods. The core of this argument rests on two consumer behavior dynamics. Firstly, durable goods like appliances or furniture, which constitute a significant portion of U.S. imports, are purchased infrequently, leading to poor consumer price recall. This lack of recent price memory, contrasted with frequently bought items like a 'Snickers bar,' makes it easier for companies to pass on tariff-related costs without significant consumer backlash. Secondly, widespread discussion of tariffs has conditioned consumers to view price hikes as 'inevitable,' a sentiment companies could leverage to pass through price increases 'with impunity.' This environment is distinct from 2018, when low inflation made businesses hesitant to raise prices. The recent experience with pandemic-era inflation has made shoppers less likely to be surprised by price increases, bolstering corporate confidence in their pricing power. While the equity market initially reacted negatively to the tariff plan, it recovered once the most severe levies were paused, highlighting the market's sensitivity to the execution of trade policy.

Key Decisions for Investors

• Investors should assess companies in the consumer discretionary sector, particularly importers and retailers of durable goods, for their potential to expand margins by leveraging tariff announcements to implement price increases beyond the direct cost of the levy.
• Monitor inflation data, specifically the durable goods component of the Consumer Price Index (CPI), as a leading indicator of whether this corporate pricing power dynamic is materializing.
• Given the market's initial sharp negative reaction to tariff news, it is prudent to anticipate and hedge against heightened volatility in sectors heavily exposed to international trade and supply chains.
• Consider overweighting positions in companies with established brand loyalty and strong pricing power within the durable goods space, as they are best positioned to capitalize on the consumer psychology described by UBS.