Tariffs are Expected to Start Showing Up More in Consumer Prices as Holiday Shopping Season Starts
News Summary
President Donald Trump's tariffs, which began in April, are expected to increasingly reflect in consumer prices during the holiday shopping season. While the impact has been muted so far this year as companies built inventories and absorbed some costs through compressed profit margins, tariffs are now anticipated to push consumer prices higher. Bank of America projects that tariffs will add approximately half a percentage point to the core Personal Consumption Expenditures (PCE) measure, closely watched by the Federal Reserve, keeping inflation elevated. For instance, without tariffs, the September inflation rate might have been closer to 2.4%, but with tariffs, it's estimated at 2.9%. Consumers are bearing about 50%-70% of the total tariff costs, leading to higher prices for items like coffee, furniture, and clothing. This can disproportionately impact consumer confidence and potentially create a self-reinforcing inflation cycle. LendingTree estimates that if duties had been in place during the 2024 holiday season, shoppers would have spent an additional $40.6 billion, and by June 2025, about 70.5% of new tariff costs were passed onto consumers, amounting to an extra $132 per shopper.
Background
The Trump administration implemented new tariffs on a plethora of items and individual countries starting in April 2025. These duties, aimed at reshaping trade relationships and protecting domestic industries, have consistently raised questions about their pass-through effect on domestic consumer prices. Concurrently, U.S. inflation measures have been trudging along between 2.5% and 3% throughout 2025, remaining above the Federal Reserve's target core inflation rate of 2%. The Fed has struggled to bring core inflation below this threshold since March 2021, making any factors that could push prices higher a critical consideration for its monetary policy decisions.
In-Depth AI Insights
Why are tariff impacts only now becoming significantly visible, and what does this reveal about corporate strategic adjustments? - The initial impact of tariffs was absorbed by companies through pre-emptive inventory building and compression of their own profit margins to avoid immediate pass-through to consumers. This indicates that businesses initially employ internal absorption strategies to maintain market share and consumer relationships when facing policy uncertainty. - As inventories deplete and profit margins face further pressure, companies are forced to begin passing costs onto consumers. This marks a shift in corporate strategy from "absorption" to "transfer," suggesting that their profit resilience is nearing its limit, or they perceive the market is ready to bear higher prices. How might tariff-induced inflation perception deeply influence the Fed's monetary policy beyond headline PCE numbers? - Even if the 0.5 percentage point increase due to tariffs seems modest, the article highlights that price hikes on everyday or seasonal goods like coffee and Christmas trees create a "constant, tangible feedback loop," having a "outsized impact" on consumer confidence beyond their weight in the CPI basket. - This strong perception of inflation could lead consumers to demand higher wages, potentially triggering a wage-price spiral, and might accelerate purchases due to expectations of higher future prices. This presents a greater policy dilemma for the Fed; even if core PCE data only rises by 0.5 percentage points due to tariffs, public inflation expectations could compel the Fed to be more cautious on rate cuts or even maintain a hawkish stance. What are the long-term implications for consumer behavior and retail profitability given sustained tariff-driven price increases? - Consumers may be forced to rely more on credit cards and personal loans to cover daily expenses and holiday shopping, potentially leading to rising household debt levels and eroding future purchasing power. Over the long term, this trend could suppress consumer confidence and discretionary spending. - Retailers face the challenge of balancing cost pass-through with sales volumes. Continuously increasing prices may lead to reduced sales, especially for non-essential goods. Retailers might be forced to seek alternative supply chains, optimize operational costs, or face further margin compression and even market share loss.