The U.S. government has collected tens of billions of dollars of tariffs under the last two years but those levies are not being passed on to consumers.
Prices for goods rose by a sizeable 0.7 percent in October, the Labor Department said Wednesday. That was the biggest monthly jump since a 1 percent rise in March. But seventy percent of that was caused by the rise in energy prices and the rest by rising food costs. Take away food and energy and prices didn’t rise at all.
Perhaps more surprisingly, the pressure on business margins from tariffs that had shown up earlier this year continued to ease. Prices of materials and components for consumer goods have fallen dramatically and business margins have improved. Retail margins rose 0.8 percent in October.
Compared with a year ago, goods prices were down 0.6 percent. Excluding foods and energy, good prices are up 0.6 percent.
Overall inflation for goods and services was slightly higher than expected. The Producer Price Index rose 0.4 percent for the month, slightly exceeding expectations and reversing last months 0.3 percent decline. But there’s no sign inflation is accelerating. Prices are up just 1.1 percent for the year, a slow down from September’s 1.4 percent annual figure.
Tariffs are Taxes, Who Pays is Complicated
So who is paying for the tariffs? We know the U.S. government has collected over $60 billion in tariffs over the last 12 months, so it is clear that someone is footing the bill. But the pricing data do not support the often-repeated mantra that “tariffs are taxes on consumers.”
Tariffs are taxes, to be sure. But unlike a sales tax or a gas tax, consumers do not directly pay any tariffs. Tariffs are paid by importers, often large U.S. companies that are importing from their own foreign subsidiaries or foreign contractors. But businesses cannot raise their prices just because their costs or taxes go up. Sometimes they have to absorb the costs.
We have seen this recently with wages, which have been rising faster than inflation, which means labor costs are rising faster than prices. Similarly, the massive cut in corporate taxes enacted at the end of 2017 did not automatically translate into businesses slashing prices because their tax costs had fallen.
In addition, the Chinese currency has depreciated over the past year, which makes imports from China less expensive. And there is anecdotal evidence that Chinese manufacturers are slashing prices in an attempt to hold on to market share in the U.S.
“We have put 25 percent on $250 billion of Chinese goods coming into our country, including $50 billion of high technology equipment. You haven’t seen any, or virtually any, price increase,” President Trump said this summer. “Because what China does is they subsidize their companies because they want to keep people working and they want to stay competitive.”
No Inflation Despite Tariffs
What both the Producer Price Index, which measures prices received by businesses, and the better known Consumer Price Index have been suggesting over the last year or so is that tariffs have not had a very big impact on prices in the U.S. That should not be very surprising. The metals tariffs have led to U.S. metals producers expanding capacity, which reduces the impact of taxes on imported metals. And a ten percent tariff on $200 billion of goods in our $20.5 trillion economy amounts to a 0.1 percent tax.
When the San Francisco Federal Reserve estimated the effect of tariffs on prices, they came to the conclusion that it had a 0.1 percent impact. But that may exaggerate the effect on consumers if businesses cannot pass on the cost of tariffs.
Durable goods, products purchased by consumers and businesses that are expected to last three years or more, are a good place to look for signs of metals tariff-led inflation. The producer-price data shows that prices of raw materials used in durable fell 1.2 percent in October, and has now fallen in six out of the last seven months. Compared with a year ago, prices are down a staggering 5.8 percent. Components for durable goods, the prices of parts that go into durables, were flat in October and are up just half a percentage point compared with a year ago. “Final demand” consumer durable good prices–those that get reflected on store shelves–fell 0.2 percent in October, the second consecutive monthly decline, and are up just eight-tenths of a percentage point compared with a year ago.
The nondurable manufactured goods category is where we might see signs of the China tariffs. Materials prices here jumped 1.8 percent in October, which might reflect the new round of China tariffs that kicked in at 15 percent on September 1. But do not shed too many tears for squeezed manufacturers. Compared with a year ago, materials prices are d0wn 9.6 percent. Parts fell 0.2 percent for the month and are down by the same compared with a year ago. The final demand category shows prices up just 0.2 percent in October and up 2.2 percent compared with a year ago, a deceleration from June’s 3 percent year-0ver-year gain, July’s 2.7, and August’s 2.3.
So the picture drawn by these broad categories is one of no inflationary pressure in durable goods, low and declining inflation in nondurable goods, extremely strong deflationary pressures further up in the supply chain, and no sign of tariff pressure at all. It is likely that sluggish global growth has diminished demand for parts and materials used in manufacturing.
Metals Tariffs Haven’t Raised Prices on Planes, Trains, or Automobiles
What about specific items? Still no signs of tariff price pressure. Start with products that were predicted to rise in price because of the metals tariffs. Specifically, cars and trucks.
“U.S. President Donald Trump’s steel and aluminum tariffs will boost car prices by hiking commodity costs for manufacturers, automakers have warned,” Reuters reported last year.
That has not happened. Car prices fell 1.5 percent in October. They are up just 0.2 percent from a year ago. Prices of light trucks–which include all those SUVs that so many American families love–fell 0.1 percent. They are down 1.1 percent from a year ago. That’s not great news for automakers but it certainly means they were wrong when they predicted tariffs would put up prices.
Car and truck parts? These fell 0.2 percent in October, the fourth consecutive monthly decline, and are down 0.3 percent from a year ago. Campers and recreational trailers? Flat in October and up just 2.6 percent from a year ago.
Seeing a pattern yet? Let’s look at some heavy-duty steel and aluminum products. Aircraft prices were up 0.1 percent in October and are up 1.7 percent from a year ago, a deceleration from steeper year-over-year gains seen this summer.
Perhaps the prices of aircraft have been held down by the trouble with Boeing planes. So let’s look at the prices of ships in October: flat for the month and 2.4 percent annually, a slight acceleration from earlier in the year. Railroad equipment prices were flat in October and up just 1.2 percent for the year.
Some of these metals heavy items, including auto parts and ships, are actually doubly subject to tariffs because they were hit by both metals tariffs and China tariffs.
Prices for Consumer Goods Are Not Rising Due to China Tariffs
Furniture is one of the biggest categories of consumer items that were hit by the China tariffs. Household furniture prices jumped 0.6 percent for the year, which could reflect the September 1 round of tariffs, but compared with a year ago they are up just 1.7 percent.
Soaps and detergents imported from China saw their tariffs rise from 10 percent to 25 percent but prices were up just 0.1 percent in October and 0.8 percent compared with a year ago.
A lot of categories of home electronic equipment were hit with the higher China tariffs. Prices here were flat in October after rising 1.3 percent in Septembre. Compared with a year ago, prices are up 3.1 percent.
Household appliances had been pushed up by a big jump in the price of washing machines following a specific tariff intended to counteract anti-competitive dumping that had depressed prices. But this has begun to unwind. On a monthly basis, household appliance prices fell every month from June through September, and rose 0.9 percent in October. For the year they are up three percent.
Computer prices snapped a long declining streak in October, rising 4 percent for the month. But they are still down 5.5 percent for the year.
A lot of the materials used in textile and clothing manufacturing in the U.S. got hit with China tariffs, including man-made textiles like rayon, nylon, and polyester. Synthetic fiber prices, however, were flat in October. Compared with a year ago, they are up 0.1 percent. Yarn and thread prices fell 1.2 percent in October and are down 3.7 percent from a year ago. Finished fabric prices rose 0.2 percent in October and are up 1.8 percent compared with a year ago.
And the tariffs on these are not pushing up prices for clothing. Women’s clothing prices were down 0.1 percent in October and are down 0.5 for the year. Men’s clothing prices were flat in the month and are up 2.1 percent for the year.
Margins Are Improving
Tariffs initially raised prices for businesses further out on the production chain but these did not get passed on to consumers in the form of higher prices for final goods, according to the data. This squeezed profit margins as businesses absorbed the cost of the higher tariffs.
Now the year over year prices for materials and components are falling as supply-chains have adjusted around the tariffs and profit margins are improving.
Evidence for this in the producer-price index comes from a category called “trade services.” Unlike the rest of the index, which measures prices received by businesses, trade services is a measure of mark-ups, the difference between what a retailer or wholesaler paid for inventory and what they sold it for. Margins for China-tariffed TV, video, and photographic equipment, which had been down by more than 20 percent earlier this year, have begun to recover. They rose for the fourth consecutive month by 0.7 in October and are down year-over-year by a less extreme 13.1 percent.
Hardware stores, which carry a lot of tariffed Chinese goods, saw margins contract on an annual basis by 5.0 percent earlier this year. They improved in August, September, and October and are down just 2.3 percent year over year. Keep in mind that these figures are all seasonally adjusted so the improvement is not caused by some seasonality in demand for hardware.
Auto-dealer margins have also recovered after being squeezed this summer. They are now down just 0.3 percent compared with a year ago.
If you go even further out in the supply chain you can see even more evidence that the impact of metals tariffs on costs is now fading from the data and that these costs never got passed through to consumers. Prices of steel mill products, which are an intermediate good used to produce consumer goods, fell three percent in October. These fell in six of the seven previous months. On an annual basis, which now means comparing prices of products immediately after the steel tariffs and more than a year after they were imposed, prices are down 13.1 percent.
It’s also likely that businesses have been better able to absorb the higher prices of imported goods or tariffed metals because last year’s massive cut in the corporate tax rate gave a big boost to after-tax profits. That softens the blow of a slight compression of pre-tax margins.
The Tariff Hoax Debunked
One of the reasons so many economists and journalists claimed, without evidence, that the Trump administration’s tariffs would be passed on to consumers is that they assumed the purpose of tariffs was to raise domestic prices to boost the bottom lines of domestic manufacturers.
But that was not the goal of the China tariffs at all. The tariffs were aimed at pressuring China to abandon its unfair and illegal trade practices. Metals tariffs did aim to boost the bottom line of U.S. steel and aluminum producers but this can be accomplished by squeezing margins of producers of intermediate products–margins that had been inflated by metals made artificially cheap by China dumping on the global market–without harming consumers.
U.S. businesses appeared to have mostly absorbed the tariffs, which put pressure on profit margins. But as businesses have adjusted to the tariffs, that pressure is now coming off.