Key Takeaways:
- The economic damage caused by Donald Trump’s tariffs in 2025 was smaller than predicted, with consumer price inflation and unemployment rates not rising as expected.
- The limited impact of the tariffs can be attributed to four main reasons: measurement problems due to the government shutdown, delayed or postponed tariffs, exceptions for certain countries, and companies absorbing the cost increases.
- Despite the current limited effects, many of the adverse effects of the tariffs are likely to be delayed and may show up in 2026.
- Companies have been front-loading imports and absorbing the cost increases, but this is unlikely to continue indefinitely, and price increases and downward pressure on real incomes are expected in 2026.
Introduction to the Tariff Conundrum
When Donald Trump took office, economists feared the consequences of his proposed tariffs, expecting surging inflation and falling real incomes. However, the actual effects of the tariffs have been less severe than anticipated. The average effective tariff on US imports rose from 2% to 18%, the highest level since the 1930s, but consumer price inflation and unemployment rates have not increased as expected. The most recently reported consumer price inflation rate is 2.7%, the same level as in the closing months of 2024, and the unemployment rate rose only slightly, from 4.1% to 4.6% in November.
Measurement Problems and Delayed Tariffs
One reason for the limited impact of the tariffs is the measurement problems caused by the government shutdown, which delayed data collection and biased the overall CPI estimate downward. Additionally, many of the highest tariffs are not fully in effect, with Trump postponing or rolling back some tariffs, and introducing major exceptions for certain countries, such as Mexico and Canada. These exceptions have helped to mitigate the effects of the tariffs, and Trump’s tendency to stake out extreme negotiating positions only to back down when the heat is on has also contributed to the limited impact.
Companies’ Response to the Tariffs
Companies have responded to the tariffs by front-loading imports and accumulating stocks of goods before the anticipated tariffs were introduced. This strategy saved US importers an estimated $6.5 billion through May 2025. After the tariffs entered into effect, most retailers did not raise prices, as they had not depleted their pre-tariff inventories. Even today, many importers have continued to absorb much of the cost increase, with the prices of goods subject to the new tariffs rising by about 5.4% at the retail level. However, this represents a small fraction of the costs that could potentially be passed through, and companies will not let tariffs erode their profit margins indefinitely.
Delayed Effects and Future Consequences
The adverse effects of the tariffs are likely to be delayed, and we should expect them to show up in 2026. Companies will eventually pass on the cost increases to consumers, leading to higher prices and downward pressure on real incomes. The uncertainty surrounding the tariffs, including the possibility of Trump changing his mind or the supreme court striking them down, has also contributed to companies’ reluctance to lay off workers. However, this uncertainty will not last forever, and the US can look forward to more price increases and downward pressure on real incomes in 2026.
Conclusion and Future Outlook
In conclusion, while the economic damage caused by Trump’s tariffs in 2025 was smaller than predicted, the limited impact is likely to be short-lived. The tariffs have already had some effects, and the full consequences will likely be felt in 2026. Companies will eventually pass on the cost increases, leading to higher prices and downward pressure on real incomes. The US can expect more price increases and downward pressure on real incomes in 2026, and it is essential to monitor the situation closely to understand the full impact of the tariffs on the economy.