The Tariff Map: Who Can Pass Along Price Increases & Who Can’t
By Jason Cheal
U.S. trade policy has driven significant financial market and business uncertainty year to date. Tariff revenue as a percentage of GDP rose to 0.9% from 0.3% year to date, a gain of $180 billion. This has been driven by an increase in the average effective tariff rate to 10% from 3%. The average effective tariff rate is equal to tariff revenue collected as a percentage of total imports and represents the point in time average tariff rate paid on U.S. imports, as calculated and published by the Yale Budget Lab.
In order to better understand how this increased cost of $180 billion is being spread among U.S. businesses and consumers, we look at year to date moves in various U.S. domestic price indices to see where the 7 percentage point increase in the tariff rate is showing up. We examine divergences in different price indices throughout the supply chain, comparing intermediate goods import prices to intermediate goods producer prices to final goods consumer prices. We assume that tariffs are the primary driver of divergences between these price indices. Each index shares many common macroeconomic drivers, but by isolating the divergences in these indices we can understand where tariffs are showing up in the supply chain, and get a loose sense of “who is paying the tariff.”
Specifically, we apply the following methodology comparing differences in inflation across the supply chain year to date [1]:
1. Tariff Impact on U.S. Consumer = Rise in Goods PCE [2] – Rise in Pre-Tariff Intermediate Goods Import Prices [3]
2. Tariff Impact on U.S. Retailer Margins = Rise in Goods PPI [4] – Rise in Goods PCE
3. Tariff Impact on U.S. Producer Margins = (Rise in Pre-Tariff Intermediate Goods Import Prices + Rise in Average Effective Tariff Rate) – Rise in Goods PPI
Note: Summed together, all terms in these equations cancel except for the rise in the average effective tariff rate. This is a simplified methodology for attributing the rise in the average effective tariff rate across different U.S. domestic players.
Put in common sense terms, this framework assumes the following:
Equation 1: Direct Consumer Impact – The tariff burden passed directly to U.S. consumers
The increase in U.S. consumer goods prices that exceeds the rise in pre-tariff import prices for raw materials and intermediate goods reflects tariffs’ direct impact on consumers. While not every final product is imported, virtually all goods sold in the U.S. contain imported components or raw materials, making them indirectly subject to rising aggregate tariff rates.
Equation 2: Retail Absorption – The portion of tariffs absorbed by retailers
This equation compares goods PPI (Producer Price Index—what retailers pay producers) with goods PCE (Personal Consumption Expenditures—what consumers pay retailers). When final consumer prices lag the rise in producer prices that is primarily driven by tariffs, this gap represents the share of tariff costs that retailers cannot pass on to consumers and must absorb themselves.
Equation 3: Producer Absorption – The portion of tariffs absorbed by producers
This equation examines producer input costs (import prices plus average effective tariff rates) against goods PPI (what U.S. producers receive). When producer selling prices lag the rise in tariff-adjusted input costs, this wedge represents the share of tariff burden that producers cannot pass on to retailers (and ultimately consumers) and must absorb in reduced margins.
Specifically, we apply the following methodology comparing differences in inflation across the supply chain year to date [1]:
1. Tariff Impact on U.S. Consumer = Rise in Goods PCE [2] – Rise in Pre-Tariff Intermediate Goods Import Prices [3]
2. Tariff Impact on U.S. Retailer Margins = Rise in Goods PPI [4] – Rise in Goods PCE
3. Tariff Impact on U.S. Producer Margins = (Rise in Pre-Tariff Intermediate Goods Import Prices + Rise in Average Effective Tariff Rate) – Rise in Goods PPI
Note: Summed together, all terms in these equations cancel except for the rise in the average effective tariff rate. This is a simplified methodology for attributing the rise in the average effective tariff rate across different U.S. domestic players.
Put in common sense terms, this framework assumes the following:
Equation 1: Direct Consumer Impact – The tariff burden passed directly to U.S. consumers
The increase in U.S. consumer goods prices that exceeds the rise in pre-tariff import prices for raw materials and intermediate goods reflects tariffs’ direct impact on consumers. While not every final product is imported, virtually all goods sold in the U.S. contain imported components or raw materials, making them indirectly subject to rising aggregate tariff rates.
Equation 2: Retail Absorption – The portion of tariffs absorbed by retailers
This equation compares goods PPI (Producer Price Index—what retailers pay producers) with goods PCE (Personal Consumption Expenditures—what consumers pay retailers). When final consumer prices lag the rise in producer prices that is primarily driven by tariffs, this gap represents the share of tariff costs that retailers cannot pass on to consumers and must absorb themselves.
Equation 3: Producer Absorption – The portion of tariffs absorbed by producers
This equation examines producer input costs (import prices plus average effective tariff rates) against goods PPI (what U.S. producers receive). When producer selling prices lag the rise in tariff-adjusted input costs, this wedge represents the share of tariff burden that producers cannot pass on to retailers (and ultimately consumers) and must absorb in reduced margins.
In the aggregate, consumer price data suggests that the tariffs are mostly not being passed on to the U.S. consumer so far. Goods CPI is up only 0.2% year to date through July and goods PCE is up 0.7% through July. Even under the more conservative assumption that U.S. consumer goods prices have risen 0.7% (as suggested by PCE, the Fed’s preferred measure [5]), it appears U.S. businesses have been able to pass on only a small portion, or roughly one-tenth, of the 7 percentage point rise in the average effective tariff rate. This suggests that so far U.S. producers and retailers have absorbed much of the increase in the average effective tariff rate in their margins. The below chart breaks out the full picture across businesses and consumers in the U.S. economy.
Given that import prices are observed pre-tariff, back of the envelope calculations suggest that roughly 3.8 percentage points of the tariff price increase, or approximately 55% of the increase in tariffs, has been absorbed by goods manufacturers (PPI rising 3.2% rather than 7%). Meanwhile roughly 2.5 percentage points, or approximately 35% of the increase in tariffs, has been absorbed by goods retailers (consumer prices rising 0.7% as compared to a 3.2% rise in PPI). The remaining 10% of the increase in tariffs has been passed on to consumers in the form of a 0.7 percentage point increase in consumer goods prices.
In summary, this analysis suggests that U.S. businesses are bearing more of the burden of tariffs than U.S. consumers through July. Moreover, these simple tariff pass-through estimates are qualitatively consistent with other estimates that adopt significantly more technical calculations.[6] However, this balance will likely shift over time, which we will continue to monitor, and in an upcoming piece we will share rough estimates for how we expect this breakdown to shift in the coming months. For reference, Fed governor Chris Waller estimates that tariffs will be shared equally between U.S. consumers, U.S. businesses, and foreign exporters.[7]
Given that import prices are observed pre-tariff, back of the envelope calculations suggest that roughly 3.8 percentage points of the tariff price increase, or approximately 55% of the increase in tariffs, has been absorbed by goods manufacturers (PPI rising 3.2% rather than 7%). Meanwhile roughly 2.5 percentage points, or approximately 35% of the increase in tariffs, has been absorbed by goods retailers (consumer prices rising 0.7% as compared to a 3.2% rise in PPI). The remaining 10% of the increase in tariffs has been passed on to consumers in the form of a 0.7 percentage point increase in consumer goods prices.
In summary, this analysis suggests that U.S. businesses are bearing more of the burden of tariffs than U.S. consumers through July. Moreover, these simple tariff pass-through estimates are qualitatively consistent with other estimates that adopt significantly more technical calculations.[6] However, this balance will likely shift over time, which we will continue to monitor, and in an upcoming piece we will share rough estimates for how we expect this breakdown to shift in the coming months. For reference, Fed governor Chris Waller estimates that tariffs will be shared equally between U.S. consumers, U.S. businesses, and foreign exporters.[7]
The ability of businesses to pass on increased tariff costs varies by industry and is partly a function of a given company’s pricing power today. Pricing power is a challenging concept to measure but represents a company’s ability to increase selling prices without reducing the demand they face. Historically, companies selling essential goods or goods facing especially strong demand have enjoyed strong pricing power. Meanwhile, those selling discretionary goods (the purchase of which can be delayed if prices rise) have faced weaker pricing power. We later examine gross margin stability as a proxy for pricing power: high pricing power companies can maintain stable gross margins through inflationary periods by passing on price increases to consumers while low pricing power companies face gross margin compression.
Today, in categories with higher pricing power such as food and computers, producers and retailers have been able to pass on more of the tariffs to consumers due to strong or sticky demand. In categories with weaker pricing power such as furniture and apparel, businesses have been unable to pass on increased tariff costs due to the more discretionary nature of the demand they face. Other industries such as pharmaceutical goods (pharma) and autos [8] have been less impacted by tariffs so far and as such have seen little increase in consumer prices year to date.
Today, in categories with higher pricing power such as food and computers, producers and retailers have been able to pass on more of the tariffs to consumers due to strong or sticky demand. In categories with weaker pricing power such as furniture and apparel, businesses have been unable to pass on increased tariff costs due to the more discretionary nature of the demand they face. Other industries such as pharmaceutical goods (pharma) and autos [8] have been less impacted by tariffs so far and as such have seen little increase in consumer prices year to date.
Digging further into this sectoral complexion, we see that for most industries in which tariffs have increased, PPI has risen more than import prices year to date. However, the wedge between PPI and import prices is much smaller than the increase in tariff rates, suggesting that U.S. producers are passing on only a portion of the increase in tariff costs to retailers. Moving down the supply chain, in each tariff exposed industry we consider except computers, CPI has risen less than PPI. This suggests that retailers have also only been able to pass on a portion of the increase in their costs to consumers.
This sectoral complexion both makes logical sense and matches what has been observed historically. Companies that produce and retail staple goods typically have much more stable gross margins than those that produce and retail discretionary goods, as shown in the figure below. As such, when input prices rise, companies producing and retailing staple goods can pass on more of the price increase to consumers.
These observations about how tariffs have flowed through the U.S. economy have important implications for both investors and households.
As investors assess which U.S. businesses will be able to sustain earnings growth through this inflationary period, they should expect big divergences across industries. These divergences will be driven both by differences in average effective tariff rates faced by different industries, and by the pricing power of the companies in the given industry. The best positioned companies will be those that either face few tariffs or those that have high pricing power.
For households, tariffs increase the likelihood of inflation in the goods basket going forward. While consumer goods inflation has been minimal so far, this is unlikely to last if average effective tariff rates continue to rise. The buffer from stockpiled pre-tariff inventories is likely behind us and companies are unlikely to absorb the full expense of tariffs in the medium term. Historical examples indicate we can expect companies to increasingly pass on tariff costs to consumers in the coming months. We dig more into these historical examples and our expectations for inflation going forward in part three of this blog series.
As investors assess which U.S. businesses will be able to sustain earnings growth through this inflationary period, they should expect big divergences across industries. These divergences will be driven both by differences in average effective tariff rates faced by different industries, and by the pricing power of the companies in the given industry. The best positioned companies will be those that either face few tariffs or those that have high pricing power.
For households, tariffs increase the likelihood of inflation in the goods basket going forward. While consumer goods inflation has been minimal so far, this is unlikely to last if average effective tariff rates continue to rise. The buffer from stockpiled pre-tariff inventories is likely behind us and companies are unlikely to absorb the full expense of tariffs in the medium term. Historical examples indicate we can expect companies to increasingly pass on tariff costs to consumers in the coming months. We dig more into these historical examples and our expectations for inflation going forward in part three of this blog series.
[1] This simplified methodology focuses on how the increased average effective tariff rate flows through the U.S. supply chain and hits U.S. businesses and consumers. In subsequent parts of this three-part blog series we will zoom out to include foreign exporters and form a more complete picture of the impact of increased tariffs.
[2] Goods PCE refers to the Goods portion of the Personal Consumption Expenditures price index, as published by the U.S. Bureau of Economic Analysis. This index measures final selling prices for durable and non-durable goods.
[3] Pre-Tariff Goods Import Prices refers to the Industrial Supplies and Capital Goods portions of the Import Price Index by End Use, as published by the U.S. Bureau of Labor Statistics.
[4] Goods PPI refers to the Unprocessed and Processed Goods for Intermediate Demand portion of the Producer Price Index by Commodity Type, as published by the U.S. Bureau of Labor Statistics.
[5] Note that Fed chair Jerome Powell recently stated: “The effects of tariffs on consumer prices are now clearly visible. We expect those effects to accumulate over coming months, with high uncertainty about timing and amounts.” See full speech by Fed chair Jerome Powell: https://www.federalreserve.gov/newsevents/speech/powell20250822a.htm
[6] Goldman Sachs, in an August research report, estimates that businesses absorbed roughly half of the tariff costs through June, while consumers absorbed roughly 20% and foreign exporters absorbed the remaining 30%.
[7] See full speech by Fed governor Chris Waller: https://www.federalreserve.gov/newsevents/speech/waller20250601a.htm
[8] Tariff exposure by industry is based on Bloomberg estimates for U.S. listed companies, aggregated to the industry level. U.S. autos, for example, are relatively less exposed to tariffs due to production and supply chains that are mostly domestic. U.S. auto manufacturers are exposed to steel and other raw material tariffs but this impact is less extreme than other industries with more global supply chains and production.
[2] Goods PCE refers to the Goods portion of the Personal Consumption Expenditures price index, as published by the U.S. Bureau of Economic Analysis. This index measures final selling prices for durable and non-durable goods.
[3] Pre-Tariff Goods Import Prices refers to the Industrial Supplies and Capital Goods portions of the Import Price Index by End Use, as published by the U.S. Bureau of Labor Statistics.
[4] Goods PPI refers to the Unprocessed and Processed Goods for Intermediate Demand portion of the Producer Price Index by Commodity Type, as published by the U.S. Bureau of Labor Statistics.
[5] Note that Fed chair Jerome Powell recently stated: “The effects of tariffs on consumer prices are now clearly visible. We expect those effects to accumulate over coming months, with high uncertainty about timing and amounts.” See full speech by Fed chair Jerome Powell: https://www.federalreserve.gov/newsevents/speech/powell20250822a.htm
[6] Goldman Sachs, in an August research report, estimates that businesses absorbed roughly half of the tariff costs through June, while consumers absorbed roughly 20% and foreign exporters absorbed the remaining 30%.
[7] See full speech by Fed governor Chris Waller: https://www.federalreserve.gov/newsevents/speech/waller20250601a.htm
[8] Tariff exposure by industry is based on Bloomberg estimates for U.S. listed companies, aggregated to the industry level. U.S. autos, for example, are relatively less exposed to tariffs due to production and supply chains that are mostly domestic. U.S. auto manufacturers are exposed to steel and other raw material tariffs but this impact is less extreme than other industries with more global supply chains and production.
