Prices are now starting to rise because of tariffs. Economists say this is just the beginning

CNN

2 days ago

Economists, researchers and analysts have warned that President Donald Trump's sweeping trade policy of tacking steep tariffs on most goods that come into America will deliver a taxing blow to consumers via higher prices.
However, recent months' economic data has shown that overall inflation has remained fairly tame.
Trump and members of his administration tout the positive economic reports as signs that tariffs are working. However, the chorus of concern is growing: Prices are moving higher, and economists say this is just the beginning.
Here's a look at the mechanisms behind why price hikes, and hotter inflation, are a slow burn:
Tariffs have been applied in a staggered manner: The earliest tariffs went into effect in February (China, non-USMCA goods) and March (steel, aluminum), but the bulk were not announced or applied until April or later.
Trade policy and tariffs are in flux: There have been plenty of instances where announced tariffs have been postponed, suddenly nixed, or unexpectedly increased or decreased in size.
Shipping takes time: Sea cargo shipments can take weeks to more than a month to reach the US from other countries.
Domestic supply chains take time, too: Once goods land on US soil, they don't hit shelves the very next day. In addition to domestic transport times, the imported products (which are not always finished goods but rather parts and materials) have to still go through the manufacturing and production processes before being distributed to sales channels.
Inventories were loaded up before tariffs hit: Near the end of last year, businesses frontloaded import orders to prepare for any disruptions that could come from a massive, and short-lived East and Gulf Coast port strike and also to get ahead of potential tariffs. Those stockpiling efforts surged this year as steep — and unexpectedly expansive — tariffs came into view and during periods in which they were postponed or lessened.
Some costs are being eaten: First, foreign exporters are absorbing some of the added costs. A Goldman Sachs analysis puts that share at about 20%, meaning that the remaining 80% of higher costs from tariffs (which are added to the price of wholesale goods when they hit US soil) have been split between US businesses and US consumers. Goldman Sachs economists expect that eventually about 70% of the direct cost of tariffs will be passed onto consumers through higher prices. (However, that 70% could move higher, depending on how much domestic producers change their prices as well, according to the analysis).
Businesses are hesitant to pass on higher prices: Consumers, hammered for years by a bout of high inflation, don't have the appetite — or the savings — for higher prices. 'Firms' pricing power is just getting a little weakened because consumer spending is starting to soften,' Nicole Cervi, a Wells Fargo economist, told CNN.
Awareness of goods prices is lower in summer than fall and winter: The US is a service-heavy economy, especially in the summertime, when spending is directed more at travel, recreation and leisure. However, some goods prices are already on the rise, and companies are warning more are on the way. However, goods will play a more central role in household budgets come fall and winter, when back-to-school season and spendy holidays such as Halloween and Christmas hit. 'I think some of this might become more real for people' later this year, said Tyler Schipper, associate professor in economics and data analysis at the University of St. Thomas in St. Paul, Minnesota.
Economic data is often lagged: Next week, for example, the Bureau of Labor Statistics will release critical inflation data that covers the month of June.
Inflation indices are comprehensive: Rising goods prices are showing up in the inflation data; however, they've largely been overshadowed by factors such as falling gas prices and a continued slowing of price hikes for services, particularly rent and housing. As such, inflation data to this point has remained fairly muted — for now.
'It's not surprising that tariff effects have not shown up strongly in official consumer prices yet,' according to a Goldman Sachs' July 8 note.
However, the seemingly muted headline inflation numbers don't tell the full story: Goods prices — particularly in tariff-exposed categories — are already on the rise, both private-sector and federal data shows.
The May Consumer Price Index showed that several tariff-sensitive categories saw price increases:
The price of appliances rose by 0.8% in both April and May, the highest monthly increase in nearly four years.
Toy prices climbed for the second consecutive month, leaping by 1.3% (matching a four-year high).
Household furnishings, tools and sporting goods showed an acceleration in price hikes after post-Covid years when prices fell.
A DataWeave analysis of 200,000 products on 13 major US e-commerce sites show that prices have risen since January:
Home and furniture prices have accelerated for the past five months as compared to January: up 1.1% in February, 2.1% in March, 2.8% in April, 3.7% in May and 4.7% in June.
Toys showed a similar trajectory, but on a smaller scale: Prices were up 3.8% in June versus January.
Apparel and footwear prices were fairly flat in February through May but shot a little higher in June, up 1.7% from January.
Some price hikes are even greater at some retailers: For example, toys at Walmart and Target were up 7.4% and 6.1% from January, versus the average increase of 3.8%, respectively.
'The percentage changes are definitely higher than what we've seen in previous years,' Karthik Bettadapura, co-founder and CEO of DataWeave, told CNN in an interview.
In June 2024, for example, home and furniture prices were up 1.9% from January, toy prices were up 0.4%, and apparel and footwear were up 0.7%, DataWeave data shows.
Bettadapura said he anticipates a further and broader 'price creep' in the coming months as tariffs ripple through the supply chain. And given ongoing pushback on higher prices, he expects there also to be a rise in shrinkflation (where brands may trim package sizes) and private-label expansion.
The June CPI, due out next week, also is expected to be the 'turning point' where the steeply higher effective tariff rate will make a bigger mark on overall inflation, said Wells Fargo's Cervi, noting expected gains in the closely watched core goods category (which excludes gas and food).
'The core goods side will start to leg up higher because of this tariff pass-through starting to take effect,' she said.
Wells Fargo expects that the overall CPI could peak at 2.9% later this year (in part because of the further disinflationary effects from the services side).
But even if inflationary impacts are 'modest,' the effects on Americans could cut deeper, said Schipper, from the University of St. Thomas.
'Right now, I am less concerned about inflation building on itself,' Schipper said. 'There's still a cost to consumers that are struggling.'