Tariffs raise the costs for merchants selling imported goods to U.S. consumers but that doesn’t mean higher costs will be passed along to consumers.
Prices on consumer goods have remained very low despite the imposition of steel, aluminum, and China tariffs this year. And they do not appear to be rising. In fact, one of the most widely tracked gauges of future inflation fell to its lowest point in 2018 Tuesday, dropping below the Federal Reserve’s 2 percent target.
Justin Lahart, a brilliant economics writer at the Wall Street Journal‘s prestigious “Heard on the Street” column, points out that Apple’s struggles to sell its more expensive phones may be instructive here:
If consumers won’t pay higher prices for their beloved iPhones, how will other companies be able to pass on higher costs?
Demand for Apple’s new iPhones has been lower than expected, leading it to slash production orders. Among the explanations, which include a maturing smartphone market and heightened competition, an important one is price. Apple’s new crop of iPhones cost $749 to $1,000, versus $649 to $769 in 2016—enough of a difference for people to hang onto their current phone a little longer or switch to a less expensive alternative.
Businesses are grappling with higher labor costs because of the tight job market and materials costs partly because of tariffs. They can try to recoup the costs by raising prices, but when consumers balk, businesses can either watch sales slide or cut prices and see profit margins shrink. Investors will be hurt by both.
Lahart also points to the recent slowdown in the housing market, where higher prices and higher mortgage rates have driven buyers away.
This shouldn’t be shocking. Consumer prices are not created by some automatic markup from the cost of manufacturing goods. Instead, they are set by consumer demand, which is in turn largely a reflection of expected income. And while income expectations have improved since the election of Donald Trump, they still do not appear enough to support a broad rise in the price level.
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