The most recent consumer sentiment survey out of the University of Michigan saw expectations of inflation one year from now to be the highest since 1981 amid President Trump’s whirlwind tariff policies.
A new analysis by the Federal Reserve Bank of Boston found that Americans are right to expect the costs of tariffs to be reflected in their receipts.
Researchers based their findings on a Morning Consult survey of over 400 small and medium-size businesses in late December that explored expectations and plans for tariffs. Respondents expected costs to rise due to higher tariffs on most US trading partners and planned to pass along those charges to consumers in the form of price hikes.
The analysis concluded, among other things, that “firms planned to pass along the expected tariff-induced changes in unit costs to their customers through price increases; the extent of this cost pass-through would vary under different tariff scenarios.”
The extent of the price hikes depended on the tariff scenario, companies said. Interestingly, they anticipated the sharpest price hikes in a low-tariff (10% rate) scenario, compared to high-tariff (25% rate) and uncertain (10% rate but variable) scenarios.
A tariff is a tax that a company importing goods pays when the goods clear customs at a port of entry; it is not paid by an exporting company or country. Businesses have a few options to offset the additional costs, such as eating the costs or negotiating with suppliers, but the most common tactic is to pass the costs on to consumers.
The UMich survey found that consumers expect inflation to be 6.7% higher a year from now, up from 4.9% the month prior. Longer-run inflation expectations for the next five to 10 years also rose to 4.4% in April from 4.1% in March. A new New York Fed survey found similar but less extreme expectations.
In a note over the weekend, after President Trump backed off the higher levels of his “Liberation Day” tariffs and announced some exemptions on tech products, Capital Economics calculated that the overall effective tariff rate on US imports stands at around 22%, down from 27% last week.
Read more: The latest news and updates on Trump’s tariffs
Despite the recent softening of the White House’s tariff stance, President Trump’s trade agenda has lifted the tariff rate on US imports to its highest level in over a century, which has driven inflation expectations higher and US growth expectations lower.
According to the Boston Fed, importers expect tariff-induced cost increases to take about two years to be fully reflected in prices. One variable that is still not well understood is how tariffs on US imports will affect the prices charged by domestic firms, which has further implications for the inflation outlook.
Economists have warned that consumers should expect inflation to accelerate again, especially for imports from China, which face a hefty 145% tariff rate.
“If, in the short run, we have a big pullback in the supply of goods, that could show up in higher consumer prices,” former Federal Reserve Board economist Claudia Sahm told Yahoo Finance in an interview on Thursday. “T-shirts could be the new eggs here shortly.”
On Friday, Federal Reserve presidents Susan Collins and John Williams told Yahoo Finance that they see inflation rising above 3% this year on account of President Trump’s tariffs.
Companies are also beginning to implement or prep customers for price hikes, even as they work to mitigate those price shocks through inventory management and working with suppliers.
German automaker Volkswagen (VWAGY), for instance, recently added an “import fee” on all vehicles affected by the 25% auto tariffs.
On a March earnings call, Best Buy (BBY) CEO Corie Barry said, “We expect our vendors across our entire assortment will pass along some level of tariff costs to retailers, making price increases for American consumers highly likely.”
Click here for the latest economic news and indicators to help inform your investing decisions
Read the latest financial and business news from Yahoo Finance
