The proposed tariffs on China, Mexico, Canada and other U.S. trading partners could raise prices for consumers on everyday items by up to 2.6%, according to a study released Friday by the Federal Reserve Bank of Atlanta.
The tariffs on Mexico and Canada, which President Donald Trump says will go into effect Tuesday after he previously postponed their implementation, drive almost half the price effect, the study’s authors found. They analyzed data from the U.S. Census, S&P Global and consumer insights firm Numerator to estimate the price effects of 10% tariffs on China, 25% on Canada and Mexico and 10% on the rest of the world.
Trump placed 10% tariffs on Chinese goods in February, and China retaliated with its own levies. On Thursday, Trump said he would enact another 10% import tax on China next week. He also said he would implement tariffs on other countries in April to match how they tax American exports.
Tariffs are a tax on imported goods; they are costs that generally get passed along to the end buyer, typically consumers. Economists generally view tariffs as inflationary, and the cost of living and inflation were the top issues among Georgia voters polled in January by The Atlanta Journal-Constitution.
Concerns about inflation, Trump’s aggressive stance on trade and cuts to federal agencies have contributed to concerns about the broader economy. The Conference Board’s Consumer Confidence Index fell in February by its largest amount in a single month since August 2021.
On Friday, the Atlanta Fed’s GDPNow indicator, a separate analysis, predicted economic contraction of -1.5% on an annualized basis in the first quarter amid a recent weak report on consumer spending and a widening U.S. trade deficit. Its previous prediction had the economy growing by 2.3% on Feb. 19.
Tariffs are not a new Trump policy. In 2018 and 2019, Trump hit many Chinese goods with import taxes during his first stint in the White House, and President Joe Biden continued them. Because of those tariffs, the U.S. now relies less on Chinese imports, the Atlanta Fed researchers found.
But as imports from China declined, the share of goods brought in from Mexico and other trading partners increased, which now could lead to greater price effects from Trump’s latest tariffs.
The potential impacts depend on how much companies pass the increased cost on to consumers. During Trump’s first term, companies passed on all of the tariff impacts to Americans, research shows.
This time, if all of the costs from Trump’s import taxes are passed on to consumers, the cost of everyday retail purchases, such as food and general merchandise, would increase by 1.6%, the study found. If you exclude food and services, there would be a 2.6% increase in prices. But if just half the import taxes are passed on, prices would increase by 0.8% or 1.3%, respectively.
The potential increase in the prices of food and merchandise if all of the costs of tariffs are shifted to consumers is more than the rate of inflation over the past 12 months, which was about 1.2% for those goods in January, according to Salomé Baslandze, one of the study’s authors.
Categories such as apparel and electronics will be affected more than, say, food because they are imported more, Baslandze told the AJC.
The authors caution that their estimates should be viewed as the lower bound of how much prices could increase, not the ceiling, because they did not look at the indirect ways tariffs can affect prices.
Indirect effects mean that the “more complex ... the product, and more complex is the production structure,” the more price impact we should see, said Baslandze, a research economist and assistant policy adviser at the Atlanta Fed. “These indirect effects are sizable, and they’re at least as big as the effects from the direct impact.”
Credit: AP
Credit: AP
Trump’s latest round of import taxes comes after a period of high inflation that already has pinched Americans' wallets. The Atlanta Fed researchers looked at whether companies might limit how much of the increases they pass on since consumers already have dealt with increased prices. But that doesn’t seem to be the case.
“The industries with the highest import intensity did not experience the greatest price growth,” the authors wrote. “Since these industries were not the primary drivers of inflation, the recent inflation experienced by consumers is unlikely to limit firms in these sectors from passing future tariff costs onto them.”
But even before Trump was elected and started implementing tariffs, consumers were cutting back on spending because of inflation and increased interest rates, according to a new study from Wells Fargo. Nearly 80% of respondents in the South said they were adjusting their spending habits, the highest share of all regions in the study.
“People are saying, ‘Let’s be more intentional with what we’re doing’ as opposed to just, like, spending money because we’re spending money,” Emily Irwin, head of the Advice Center at Wells Fargo, said. “Let’s actually look at the price tag and say, ‘Does this make sense now, or is this something that we should cut back on now in order to be able to fuel a future purchase?’”
Credit: Miguel Martinez-Jimenez
Credit: Miguel Martinez-Jimenez
However, some experts caution to not get overly concerned yet about tariffs. Roger Tutterow, economist and professor at Kennesaw State University, thinks Trump tends to think out loud, which can cause uncertainty.
“Let’s wait and see what is rhetoric and what is actually policy positions,” Tutterow said Wednesday at an economic forecast breakfast held by regional banking giant Synovus. He thinks a lot of the tariffs “will be a hammer for him to use to implement other aspects of geopolitical policy.”
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