The impact of U.S. President Donald Trump's tariffs on consumer prices is just beginning, according to research from Goldman Sachs, adding more uncertainty to a U.S. Treasury market already shaken by changing expectations for the pace of interest rate cuts. U.S. businesses have so far borne much of the brunt of Trump’s tariffs, but as companies raise prices, the burden will increasingly be passed on to consumers, economists including Jan Hatzius wrote in a report.
As of June, U.S. consumers are estimated to have borne 22% of the tariff costs, but if the latest tariffs follow the pattern of impositions over the past few years, that share will rise to 67%, they wrote.
The end result: accelerating inflation. Goldman Sachs analysts expect the core personal consumption expenditures index, one of the Fed's favorite inflation measures, to hit 3.2% year-over-year in December. Core inflation, excluding the impact of tariffs, would be 2.4%, they said. In June, the figure was 2.8%.
At a time when Fed policy is a hotly debated topic, the report reinforces a widely held view among economists that Trump's broad tariffs will push up inflation. Not only bond traders, but also the president himself weighed in on Fed policy. Trump broke with convention by publicly calling on the Fed to cut interest rates, suggesting that Chairman Jerome Powell should resign and adding a confidant to the Monetary Policy Committee (at least temporarily).
Bond traders are now keeping a close eye on inflation data on Tuesday for clues on how quickly the Federal Reserve will cut interest rates. Last week, the 10-year U.S. Treasury yield rose about 7 basis points, but fell back during European trading on Monday.
Traders now see a more than 80% chance of a rate cut at the Fed's September meeting, but the possibility of further easing in coming months is clouded by the uncertain impact of tariffs on inflation.
staged impact
Most economists view tariffs as inflationary because businesses would logically pass on the additional costs to consumers. But this view is not unanimous – and the debate stems partly from a matter of definition.
“From the perspective of central banks setting monetary policy, what concerns inflation is a sustained increase in the overall price level,” Oren Cass, founder and chief economist of American Compass, said on a recent episode of the Bloomberg Trumponomics podcast. “If you choose a policy, the design itself is to make a one-time adjustment to the price of certain goods, which in a sense is not the kind of inflation that central banks need to worry about.”
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Goldman Sachs analysis shows companies are not raising prices all at once, supporting the argument that tariffs will eventually lead to inflation. The bank said the impact of tariffs has now increased core personal consumption expenditures (PCE) by 0.2%, and is expected to increase by another 0.16% in July and by another 0.5% for the rest of the year.
The report said that although U.S. companies currently bear about 64% of the tariff impact, their proportion will fall to less than 10% as they pass on more costs to consumers.
Analysts added that the impact of tariffs on U.S. businesses has been mixed - with some bearing a greater share of the tariff hit, but domestic producers shielded from outside competition benefiting from higher prices. These opportunistic price increases also push up inflation.
Goldman Sachs said foreign exporters had absorbed about 14% of tariff costs as of June, but that could rise to 25%.