Despite President Donald Trump’s stern entreaty last month to Walmart to “eat the tariffs,” new Federal Reserve data reveal that many U.S. businesses are following the example set by the world’s largest retailer by quietly increasing prices and passing them onto consumers.
Results from the Fed’s 2nd District survey indicate that most East Coast businesses passed on at least some of the higher tariffs to their customers, with nearly a third of manufacturers and about 45 percent of service firms fully passing along all tariff-induced cost increases by raising their prices.
“Businesses subject to these higher costs have been faced with difficult and complex decisions about whether to absorb the tariffs through lower profits, raise their prices to recover the higher costs, or some combination of both,” stated the report, which was compiled by the New York Fed’s Research and Statistics Group.
“These decisions are influenced by the degree of competition in the marketplace, potential customer reactions, and the ability to maintain profit margins, among other factors.”
Jaison Abel, head of microeconomics at the New York Fed, led the study, which was conducted between May 2 and May 9 and released on June 4. His team included Richard Deitz, senior policy adviser; research economists Sebastian Heise and Ben Hyman; and data analytics specialist Nick Montalbano.
The Liberty Street survey was conducted before the reduction of tariff hikes on goods from China, which were decreased from 145 percent to 30 percent, and before any court decisions regarding tariffs at the end of May.
At the time of the survey, manufacturers estimated that the average tariff rate they paid on all imported goods from all countries was 35 percent. In comparison, service firms reported an estimated average tariff rate of 26 percent, consistent with other estimates of the average effective tariff rate faced by U.S. firms at that time.
Other details of the survey show that many businesses in the region have been exposed to higher tariffs. For example, about 90 percent of manufacturers and about three-quarters of service firms in the surveys import some goods, with the average imported input share among all firms at around 30 percent.
Consequently, manufacturers reported that the cost of their tariffed goods had increased by an average of approximately 20 percent over the past six months. In contrast, service firms reported an average cost increase of roughly 15 percent.
“While these figures are quite close to the increases in the firms’ average tariff rates, firms’ costs of tariffed goods may not have increased by as much as the tariffs in part because importers may have switched towards suppliers in other countries or in the United States; foreign suppliers may also have lowered their prices to help offset the tariffs,” the report stated.
Regarding how businesses adjusted their operations in response to higher tariffs, roughly half reported raising the prices of goods directly subject to those tariffs. These businesses also noted that they have adapted to higher tariffs in other ways, including adjusting capital investments and headcounts, reducing inventory levels, and purchasing more American goods.
“Consistent with textbook economics, tariffs generally resulted in higher prices to customers. Indeed, roughly half of businesses reported raising prices of goods directly subject to tariffs,” the report said.
“Interestingly, a significant share of businesses also reported raising the selling prices of their goods and services, unaffected by tariffs.”
Many businesses indicated they increased prices to cover other rising costs such as wages and insurance, though it is possible that in some cases, businesses were taking advantage of an escalating pricing environment to increase prices.
Higher tariffs also affected where businesses sourced their products, as well as inventory levels. As expected, the survey noted, a significant share of companies reported an increase in goods purchased from within the United States, and a similar share reported a decline in goods they imported.
Just under a third of both manufacturers and service firms reported increases in their inventory levels, partly to anticipate rising tariffs and create an inventory buffer against potential supply shortages. Conversely, about 15 percent of businesses reported declining inventories, likely reduced to meet demand as some customers advanced their purchases to build their own stockpiles and get ahead of any tariff-related price increases or supply shortages.
That sentiment was shared by Ernie Goss, Creighton University economist and director of the university’s Economic Forecasting Group, who, via email, told The Epoch Times that there is anecdotal evidence that tariffs are being used by some businesses as a means to increase retail prices, regardless of whether they are applicable or not.
“Prices at the wholesale level continue to inch up. That is a concern for the Federal Reserve. Approximately 56.5 percent reported that tariffs have pushed up price growth and their payment for inputs,” said Goss.
Both the Mid-America index and the Fed survey also emphasize that many businesses are struggling with decision-making and establishing suitable pricing strategies amid increased uncertainty.
“Indeed, in early May, about half of service firms expected tariffs to move higher in the next six months and about a third expected tariffs to decline. Among manufacturers, about a third expected tariffs to increase over the next six months, while more than half expected them to decline,” the Liberty Street report said.
Goss also stated that members of the policy-making Federal Open Market Committee, which includes New York Fed President John Williams, will likely be hesitant to cut interest rates at the upcoming June meeting; however, there is ample evidence supporting a rate cut due to the slowing economy.
“The regional inflation yardstick has moved into a range indicating that inflationary pressures are moving higher at the wholesale level. However, due to a slowing economy, I expect the Fed to cut interest rates at its next meetings on June 17–18,” said Goss.
