Business Prices Dropped Again in January, Showing No Signs of Tariff-Led Inflation

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Prices fell in January, providing even more evidence U.S. businesses are not passing on the costs of tariffs to consumers.

The Labor Department said Thursday that its Producer Price Index fell in January. Compared with the prior month, prices were down 0.1 percent. Economists had expected prices to rise two-tenths of a percentage point.

Far from rising rapidly, the prices of cars, trucks, and most consumer goods thought to face tariff pressure have risen at or below the overall rate of inflation. One exception is household appliances, which saw prices increase in both December and January on a seasonally adjusted basis.

This was the second consecutive monthly decline for the Producer Price Index. Compared with a year ago, prices are up 2 percent, in line with the Federal Reserve’s target.

The Producer Price Index measures prices received by businesses rather than prices paid by consumers. It can pick up pricing pressures higher-up in the production chain that have not reached the shelves of stores and showrooms. It typically moves in the same direction of the more familiar Consumer Price Index, although there are often lags and gaps between the two.

The index for final demand goods–which are those translate most directly into consumer prices–moved down 0.1 percent in January, the second consecutive month of declines.

One reason for the drop in prices was the steep drop in the price of energy. Final demand energy dropped 3.8 percent for the month. Gasoline prices dropped 7.3 percent for the month and is down 23 percent compared with a year ago. Home heating oil dropped 9.9 percent. Natural gas for residential heating fell 0.9 percent.

Absent the volatile food and energy categories, prices of goods rose 0.3 percent, in line with the gains seen in October and November but slightly above the 0.1 percent rise in December.

Inflationary pressures have been easing. Producer prices advanced 0.1 percent in b0th December and November, down from 0.6 percent in October.

Price levels have held remarkably steady on most categories of goods in 2018, defying predictions that American households would be squeezed by tariffs on steel, aluminum, and around $250 billion of goods made in China. This week the U.S. Treasury said it collected around $6 billion in tariffs in December, double what it collected a year earlier. For the third-quarter, customs and duties on imports amounted to $18 billion, 42 percent higher than a year ago.

President Donald Trump said Tuesday that China now is “paying billions of dollars a month for the privilege of coming into the United States.”

Critics inaccurately claim that tariffs are paid by U.S. businesses and consumers, as prices are pushed higher. The data indicate, however, that the burden of tariffs is being borne by Chinese businesses and corporate margins in the U.S. rather than weighing on consumers. Exporters can effectively pay for tariffs if their country’s currency drops or they slash prices to stay competitive.

Ever since the tariffs on steel and aluminum have gone into effect, price increases have more noticeable further out on the production chain of materials and components that go into making final goods rather than the goods sitting on shelves. The price of iron and steel, the latter of which got a 25 percent protective tariff 10-months ago, is up 11.3 percent compared with last January. But that’s far less of a gain seen immediately after the tariffs, suggesting that domestic producers have expanded production. For the month, and iron and steel prices fell one percent.

Prices of materials used in durables manufacturing—which are those most likely to be affected by the tariffs on steel and aluminum—were flat after falling 0.2 percent on a monthly basis in the four previous months.  For the year, prices were up 7.0 percent, a slowdown inflation from Decembers 7.6 percent gain and much lower than seen in earlier months. Prices of components for durables manufacturing fell 0.1 percent on a monthly basis, and are up 2  percent for the year.

Prices of durable goods were up 0.7 percent in January after falling in the prior 2 months Compared with a year ago, prices were up just 2.2 percent.

What this suggests is that the cost of metals tariffs is getting swallowed along the production process by each contributor–from producers increasing production, to the buyers of raw metals, to the producers of final goods–and not reaching consumers.

Another big metals using category is automaking. Here too there were many predictions that metals tariffs would push prices up. And those predictions have been wrong. Car prices rose 0.5 percent for the month after being flat in December and down November. Compared with a year ago, car prices are up just 0.9 percent. Light trucks—which include pickups and many sports utility vehicles—were up 0.3 percent for the month and are up just 1.2 percent annually.

Prices of household appliances rose a sharp 3.2 percent on a seasonally adjusted basis in January. This might be a post-holiday roll-off of holiday discounts. Prices fell in November–probably because of Black Friday sales–and rose just 0.8 percent in December. Note that the unadjusted price of appliances was also up 3.2 percent, which means the Labor Department doesn’t account for the end of holiday sales at all, which seems odd. For the year, appliance prices are up 5.6 percent.

In fairness, the jump in appliance prices may not just be holiday sales hangover. January’s unusually monthly gain could be the strongest indication in the numbers that the second round of China tariffs pushed up prices. Or it could be a delayed impact from metals tariffs. But keep in mind that this category includes washing machines, which got their own tariff directly designed to combat foreign dumping that had depressed prices.

In any case, appliance prices can be volatile month-to-month, especially around the holidays. And better wage gains and a slight recovery in home sales may be pushing up demand for appliances. This category is worth watching once the holiday fluctuations come out of the data.

Another category that could be hit by the China tariffs, however, was barely up for the month: home electronics rose 0.2. For the year, prices are up just 0.2 percent.

The lack of transmission through the chain of production suggests that it is wrong to assume that consumer prices are determined by businesses setting their price as a markup over production cost. If that were the case, the prices on final goods included in the PPI would move up when intermediate materials prices move up. Given muted wage increases over the last several years, as well as an increase in inequality that has seen much of the economic gains in recent decades concentrated with the very wealthy, it may not be possible for businesses to pass on higher costs. Consumers cannot afford to pay more.

Instead, it appears that the markups are falling—reducing profit margins of American businesses. These were bolstered, however, by very significant cuts in the tax rates paid by American businesses. Tariffs may simply be offsetting some of the profit gains from tax cuts.

The evidence from January’s PPI data suggest what all price data since the Trump administration began imposing tariffs have suggested: consumers do not necessarily pay for tariffs, at least in the short-run.

The PPI data demonstrate that while some businesses are paying higher prices, they have not succeeded in passing most of those costs on to consumers.

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