A top economist takes a look at the real consumer impact of tariffs.
Transcript:
BRIAN JACOBSEN: I don’t think that tariffs are necessarily going to lead to faster inflation. Mainly because when the Fed thinks about inflation it’s at the consumer level. It is more likely that businesses are either going to have to eat the cost of that because of a reduced inability to pass on those cost increases to consumers, or we are likely to see exchange rates adjust, just like we have seen the Chinese currency go down in value by about 4% since September. Effectively, that’s pricing in maybe a 10% tariff. So between exchange rate changes and then profit margin compression, I think those are some shock absorbers before we would see consumer price inflation. So I actually think tariffs are a bigger threat to the equity markets in terms of profit margins as opposed to the fixed income markets in terms of inflationary pressures.
CONWAY GITTENS: But what makes you so sure that companies won’t be won’t have a willingness to pass on the tariff prices on to consumers?
BRIAN JACOBSEN: We have seen, you know, in recent history a great willingness to pass on everything to the consumer. That is correct. And I think that is one of the risks here, is that I could be wrong about that, about the ability of them to not pass on the increases. It’s just that in this environment, I believe consumers are becoming choosier searching out discounts. We’ve already heard that from a few of the reporters. If we look at a company like, let’s say Macy’s M, just as an example, how they talked about consumers are still engaged, but they’re being choosier and looking for discounts. I think that we’re also seeing that we have seen that last quarter with the difference in behaviors and the stock price of, say, Walmart WMT versus Target TGT.
The ability to push price higher on consumers is not what it used to be. I think that coming out of covid, there is this collective belief amongst businesses that, hey, we can all push prices up together. When you have tariffs. I think that maybe you’re getting a little bit of that inflation fatigue on the consumer part, and it’s a harder story for people to or businesses to claim that they can pass on those prices. Now, I could be wrong about that, but it does seem like profit margins are historically elevated and there is some room for those to come in.
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