Donovan: Inflation Won't stop Tariffs
While tariffs add costs to imported goods, the full burden doesn’t directly translate to shelf prices. For instance, a 20% tariff on an imported product might only result in an 8% increase in its retail price. This is because tariffs apply at the import stage, and the additional costs are often absorbed or diluted through adjustments in profit margins and distribution expenses as goods move along the supply chain. As a result, the price hikes are less noticeable to consumers.
The impact of tariffs is further diminished on infrequently purchased items, such as durable goods. Public perceptions of inflation are shaped more by the costs of everyday essentials like food and fuel, which are often domestically sourced and less influenced by tariffs. This divergence means that while tariffs may add to overall inflation, their effect on politically sensitive inflation perceptions remains limited.
Consequently, even though tariffs contribute to higher prices, their impact on consumer sentiment and political pressure related to inflation is relatively muted. According to UBS, protectionist policies are more likely to be driven by political considerations than by inflationary concerns. For now, there’s little indication that inflation fears will prompt a retreat from tariffs, despite their contribution to rising costs.
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