The holiday season and surging consumer sentiment is not pushing up prices.
Prices received by U.S. businesses were unchanged in November, indicating extremely low inflationary pressure in the economy despite very low unemployment, recent tariff hikes, and rising wages, according to data released by the Labor Department Thursday.
Holiday shoppers were not facing sticker-shock in the toy aisles. Toy and games prices were flat for the month. Compared with a year ago, these are up just two-tenths of a percentage point.
The government’s Producer Price Index was unchanged for the month, defying expectations for a rise of two-tenths of one percent. That represented a deceleration from the prior month’s o.4 percent gain. In September, prices fell 0.3 percent.
Taken together, the three-months suggest that inflation has all but vanished from the U.S. economy, which raises questions about whether monetary policy is too tight for the Federal Reserve to hit its target of 2 percent inflation.
The Producer Price Index, or PPI, is a gauge of inflation based on prices received by U.S. businesses. It typically closely tracks the more familiar Consumer Price Index, which is based on prices paid by consumers. Both have indicated falling inflationary pressures this year, surprising economists who expected low employment, rising wages, and tariffs to raise prices.
Prices for final demand goods–those sold to consumers–rose by three-tenths of a percentage point in November, the Labor Department said Wednesday. That offset by a 0.3 percent decline in the prices of services.
The index for final demand less the volatile categories of foods, energy, and trade services was unchanged in November after inching up 0.1 percent in October. Final demand goods less food and energy was up 0.2 percent for the year.
Compared with a year ago, goods prices were up 0.2 percent. Excluding foods and energy, good prices are up 0.5 percent, a tick down from October’s figures.
The PPI data once again suggests that consumers are not being squeezed because of tariffs on imports from China and imported steel and aluminum.
Tariffs are Taxes, Who Pays is Complicated
So who is paying for the tariffs? We know the U.S. government has collected tens of billions of dollars in import duties 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
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 0.5 percent in November, and has now fallen in seven out of the last eight months. Compared with a year ago, prices are down a staggering 6.1 percent. Components for durable goods, the prices of parts that go into durables, were flat in November and 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–rose 0.1 percent after declining in September and October. These prices are up just nine-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 fell 0.8 percent, reversing the previous month’s 1.8 percent jump that may have been caused by the new round of China tariffs that kicked in at 15 percent on September 1. Compared with a year ago, materials prices are d0wn 8.6 percent. Components prices were flat for the month and are down three-tenths of a percent from a year ago. The final demand category shows prices up just 0.3 percent in November and up 2 percent compared with a year ago, the fifth month of decelerating price gains.
So the picture drawn by these broad categories is one of low and declining inflation in both durable and nondurable goods, extremely strong deflationary pressures further up in the supply chain, and no sign of tariff pressure at all.
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 rose 0.1 percent in November. They are up just 0.4 percent from a year ago. Prices of light trucks–which include all those SUVs that so many American families love–rose 0.5 percent. They are down 0.6 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 rose 0.1 percent in November, following four consecutive monthly declines, and are down 0.2 percent from a year ago. Campers and recreational trailers? Up 0.3 percent in November 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 November and are up 1.6 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 November: flat for the second consecutive month and 2.2 percent annually, a deceleration from earlier in the year. Railroad equipment prices rose 0.1 percent and are up 1.3 percent from a year ago.
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 rose 0.3 percent for the month and were up 0.6 percent in October, which could reflect the September 1 round of tariffs, but compared with a year ago they are up just 1.8 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 November 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 both November and October after rising 1.3 percent in September. Compared with a year ago, prices are up 2.9 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. They were flat in November. For the year they are up 3.3 percent.
Computer prices snapped a long declining streak in October, rising 4 percent for the month. But prices were flat in November and they are down 5.1 percent for the year.
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.