Donald Trump has made much hay of criticizing Goldman Sachs. He responded to a major investment bank’s new report, which cautions that as the year goes on consumers will feel a much heavier impact from tariffs. As the impacts of the pandemic continue to unfold, economists are taking another look at those forecasts. They warn that the joint effect of these tariffs will increase inflation and negatively impact consumer spending.
Goldman Sachs’ economists went on to explain their weekend findings. In their announcement, they showed that the expected consumer impact from these tariffs has become much more negative. The story in their report is about a dramatic reversal in outlook. Even the most pessimistic forecasters weren’t fully prepared for the serious hit to consumers that will be felt as tariffs continue to go into effect through the end of 2023.
The August report indicates a turning point in economic sentiment. CPI – Consumer price index – reports indicate no increase or upswings thus far. Economists say the worst tariff-related blows to inflation have yet to arrive. Alarm bells are being rung by economists. They caution that persistent inflation could limit consumer spending and slow overall economic growth through the natural rest of the year, especially after de minimis tariff exceptions expire on August 29.
Previously, de minimis exceptions had permitted goods valued at less than $800 to enter the United States duty-free. With these exceptions now expired, companies will almost certainly pass increased costs directly onto American consumers. True, effective tariff rates are through the roof. Some scary estimates have them peaking at close to 18%, a chilling jump from roughly 3% at the beginning of this year alone. As the private sector grows less willing to swallow these expenses, it is consumers who will ultimately bear the brunt of these rising costs.
Gus Faucher, chief economist at PNC, expects tariffs to push inflation higher in the months ahead. “Tariffs will lead to higher inflation in the months ahead,” he stated. Michael Feroli, the chief U.S. economist at JPMorgan Chase, said they are likely to cut GDP 1%. Simultaneously, they would have the potential to raise inflation 1 to 1.5%. All of this has already happened,” he said, highlighting the past, albeit delayed, but coming effect on consumer costs.
Most economists project a gradual rise in prices as more certainty about the fate of tariffs comes to light. Monthly inflation increases are forecasted to range anywhere from 0.3% to 0.5%, thus stopping what some have feared as potentially runaway inflation. Brian Rose from Pantheon Macroeconomics remarked, “Only about a quarter of that uplift has filtered through to consumers so far, so we see a strong chance core goods prices will rise at a faster pace over coming months.”
Yet companies will soon find it harder to absorb the increased duties given the new economic reality. If it passes, consumers may soon find themselves paying inflated prices for essential products. If inflation were to become sustained in the long run, it would increase fears of inflation stickiness in the real economy. Analysts at BNP Paribas are warning of growing upward pressure on services input prices. This tectonic trend would make the underlying inflation picture even more complicated to parse.
Analysts highlight encouraging signs in last month’s report, such as unexpected firmness in core services from the July CPI print. At the same time, they warn against jumping to conclusions too quickly. “The July CPI print is therefore not compellingly good news,” remarked an economic firm source, reflecting concerns over the broader implications of tariff-induced inflation.