With new tariffs on furniture and lumber taking effect on Tuesday, an analysis released by Goldman Sachs shows that American consumers are bearing more than half of the costs of the duties imposed by U.S. President Donald Trump.
In a note to its clients, the global investment and banking giant said U.S. consumers are expected to shoulder 55 percent of the tariff costs by the end of this year. According to the Goldman Sachs analysis, American businesses would bear 22 percent of the costs, foreign exporters would bear 18 percent, while about 5 percent of the tariffs would be evaded.
The analysis added that by the end of next year, consumers could be covering as much as 70 percent of the total cost.
“Most of the cost seems to be borne by U.S. firms,” Harvard University professor Alberto Cavallo said in an interview to discuss his findings. “We have seen a gradual pass-through to consumer prices, and there’s a clear upward pressure.”
The tariff impact has so far pushed up the core PCE price level by 0.2 percent, Goldman Sachs said, projecting a further 0.16 percent increase in July, followed by an additional 0.5 percent rise between August and December. Assuming the underlying inflation trend, excluding the effects of tariffs, remains at 2.4 percent, the year-on-year core PCE inflation rate is expected to reach 3.2 percent in December, it noted.
Who is eating the tariffs?
Cavallo and researchers Paola Llamas and Franco Vazquez have been tracking the price of 359,148 goods, from carpets to coffee, at major online and brick-and-mortar retailers in the United States.
They found that imported goods have become 4 percent more expensive since Trump started imposing tariffs in early March, while the price of domestic products rose by 2 percent.
The biggest import increases were seen in goods that the United States cannot produce domestically, such as coffee, or that come from highly penalized countries, like Turkey.
These price hikes, while material, have been generally far smaller than the tariff rate on the products in question, implying that sellers were absorbing some of the cost as well.
Yet U.S. import prices, which don’t include tariffs, showed foreign exporters have been raising their prices in dollars and passing on to their U.S. buyers part of the greenback’s depreciation against their currencies.
“This suggests foreign producers are not absorbing much, if any, of the U.S. tariffs, consistent with prior economic research,” researchers at Yale University’s Budget Lab think-tank said in a blog post.
Full impact of tariffs yet to be felt
Adapting to Trump’s tariffs, a still-incomplete set of levies that pushed import taxes from an average of around 2 percent to an estimated 17 percent, is still underway. It is seen taking months longer as exporters, importers and consumers jostle over who pays duties worth around $30 billion per month.
“We shouldn’t expect this to be a one-time jump but rather firms are trying to find ways to soften the blow,” and stretch price increases out over time, Cavallo explained.
European carmakers have looked at potentially absorbing more of the price impact, but consumer firms, including Tide detergent-maker Procter &Gamble, Ray Ban-maker EssilorLuxottica, and Swiss watchmaker Swatch, have hiked prices.
Around 72 percent of companies in Europe, the Middle East and Africa tracked by Reuters flagged price hikes since Trump’s trade salvoes started. Only 18 companies have warned about profit margins.
The U.S. Fed cut its benchmark rate last month due to concerns that the job market was weakening, but policymakers are divided on whether tariff-driven inflation will likely fade. The Fed’s newest governor, Stephen Miran, on leave from the Trump administration, argues that the tariffs are not inflationary and has brushed off concerns about what he called “relatively small changes in some goods prices.”
A Boston Fed “back of the envelope” calculation projected tariffs would push up core inflation by 75 basis points.
Fed Chair Jerome Powell said tariffs accounted for perhaps 30-40 basis points of the latest core inflation reading of 2.9 percent, but the effect should be “relatively short-lived.”
The Peterson Institute for International Economics estimated that inflation over the next year would be one percentage point higher than if tariffs hadn’t been raised, but would then fall back.
Global trade is seen suffering as tariffs bite
The rest of the world, however, has no reason to celebrate.
As U.S. consumers struggle to keep up with rising prices, demand for exports is likely to slow. An S&P Global survey of purchasing managers at companies all over the world showed new export orders contracting at an increasing pace since June.
European Union exports to the United States fell by 4.4 percent from the prior year in July, the latest month for which data was available, and in the bloc’s former powerhouse, Germany, they were down 20.1 percent in August.
The World Trade Organization, too, slashed its forecast for global merchandise trade volume growth next year to just 0.5 percent, citing a delayed impact from U.S. tariffs. U.S. shipment data tracked by the German think tank, the Kiel Institute, also showed a clear downtrend.
While it may partly reflect strong front-loading of orders earlier in the year in anticipation of tariffs, it is also prompting caution about the trade outlook.
Dutch bank ING expected a 17 percent reduction in EU goods exports to the U.S. over the next two years, costing the bloc 30 basis points of GDP growth.
“The expected impact of U.S. tariffs hasn’t materialized yet,” Ruben Dewitte, an economist at ING, said. “We anticipate these effects will become more visible in the coming months.”
With new tariffs on furniture and lumber taking effect on Tuesday, an analysis released by Goldman Sachs shows that American consumers are bearing more than half of the costs of the duties imposed by U.S. President Donald Trump.
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