The Real Impact of Tariffs: Inflation and Corporate Resilience

The Real Impact of Tariffs: A Closer Look

When President Trump announced widespread tariffs in April, economists predicted a surge in inflation and an increased likelihood of a recession. Businesses and consumers rushed to stockpile goods in anticipation of rising prices. However, these concerns seem to have been somewhat overblown.

While inflation remains elevated, it is lower than anticipated. And despite facing some of the steepest tariffs in nearly a century, the U.S. economy continues to grow. "I’m not entirely sure the tariff impact is as big as everyone thought," stated Kelly Kowalski, Head of Investment Strategy at MassMutual.

Meanwhile, the promised benefits of tariffs have largely failed to materialize: the tariff revenue collected by the Trump administration has been far lower than Treasury Department forecasts, and there is little evidence of a domestic manufacturing boom. The U.S. annual inflation rate in September stood at 3%, above the Federal Reserve’s 2% target. Tariffs played a role in this, but the impact was limited, primarily pushing up prices of goods like furniture and apparel.

Why the Limited Impact?

One reason is that companies are actually paying far less in tariffs than the headline numbers suggest. This is highlighted by the fact that the U.S. Treasury is collecting less in customs duties and consumption taxes than expected.

According to an analysis of customs data by Pantheon Macroeconomics, the U.S. Treasury is on track to collect $34 billion in tariffs in October. If this pace continues, total U.S. tariff revenue for the entire year will amount to $400 billion, lower than the $500 billion to $1 trillion that Treasury Secretary Bessent had predicted in August.

Pantheon Macroeconomics says these tariff revenues suggest that the effective average tax rate paid by companies is around 12.5%, far lower than the headline tax rate of over 17% in some estimates.

Loopholes and Exemptions

Loopholes and exemptions mean many goods have been able to avoid the high tariffs. Meanwhile, companies have shifted production from countries facing high tariffs to countries with low tariffs like Vietnam, Mexico, and Turkey. This has further depressed the effective tax rate.

"They’ll say: I’m not giving up offshore production, but I’m diversifying," said Randy Altschuler, CEO of Xometry, an online marketplace that connects global manufacturers and suppliers.

Companies have also avoided costs by stepping up inventory stockpiling before tariffs took effect. Signet Jewelers imports about half of its finished jewelry from India, and Joan Hilson, the company’s COO and CFO, said on an earnings call in September that the company plans to utilize bonded warehouses (where products can be stored tax-free for a period of time) and shift production to other countries to minimize tariff costs.

Patrick Kelleher, CEO of logistics company GXO, which operates warehouses across the U.S., said that the company has noticed an increase in client demand for free trade zones. He added that companies are also thinking more carefully about how much merchandise they import to avoid paying tariffs on inventory that will ultimately just sit in warehouses.

Companies Absorb Some Costs

Even when U.S. companies have to pay tariffs in full, they only pass on a portion of those costs to consumers. Bank of America estimates that consumers have so far borne 50%-70% of the tariff costs, with companies absorbing the rest. One key reason: corporate profit margins are far higher today than they were pre-pandemic, making it easier for them to absorb tariff costs without raising prices.

Pantheon Macroeconomics estimates that retailers have the capacity to absorb 30% of tariff costs while still maintaining their profit margins at average 2010s levels.

Take the auto industry, for example. According to JPMorgan data, the seasonally-adjusted average car price in September was just about 1.1% higher than in March, even though cars imported from many countries face tariffs of 15% or higher.

JPMorgan estimates that this figure implies that automakers absorbed about 80% of the tariff costs, passing just 20% onto customers. Car prices have risen sharply since 2020, and manufacturers worry that consumers simply couldn’t afford higher prices. While post-pandemic inflation pushed up prices, it also boosted profit margins, making it easier for automakers to absorb tariff costs today.

Apparel brand Aritzia faces double-digit reciprocal tariffs on its imports from Vietnam and Cambodia, and the “de minimis loophole” for small online orders has been closed, meaning many of its products can no longer avoid these tariffs. Nonetheless, the company’s profitability is strong enough to absorb the hit.

An executive at the company said on a recent earnings call that without tariffs, the company’s adjusted EBITDA margin for this fiscal year would be between 18% and 19%. As it stands, the company is forecasting margins will still be in a comfortable range of 15.5% to 16.5%. Jennifer Wong, the company’s CEO, said on the call that the company’s pricing strategy “is not predicated on tariffs.”

Data from the U.S. Department of Labor shows that import prices didn’t fall significantly before tariffs were imposed, suggesting that foreign suppliers generally didn’t offset the impact of tariffs by lowering prices.

Limited Impact on Consumer Spending

In addition to inflation, economists had worried that tariffs would drag down consumer spending, which accounts for nearly 70% of GDP. In April, the consumer confidence index fell to its lowest level since 2022. In the past, a drop in confidence has often led to a drop in spending. But this year, buoyed by a record-breaking stock market and low unemployment, Americans have been on a buying spree.

Still, economists say that it’s too early to declare victory. They believe that tariff-related costs and uncertainty have caused some companies to be more hesitant in hiring, which could exacerbate labor market weakness. Economists also expect companies will eventually pass on a larger share of tariff costs to consumers. Many companies are gradually raising prices, meaning that the impact of tariffs on inflation could linger into next year.