Last Sunday, Fox’s Chris Wallace confronted Peter Navarro with a chart that suggested the administration wasn’t telling the whole story when it comes to the effect tariffs are having on the prices of US goods. Wallace cited a Goldman note from May.
For those who missed it, the bank called the effect of the tariffs on consumer prices over the last 18 months “larger than… previously estimated”.
As Goldman explained, that’s because “the costs of US tariffs have fallen entirely on US businesses and households, with no clear reduction in the prices charged by Chinese exporters” and also because “the effects of the tariffs have spilled over noticeably to the prices charged by US producers competing with tariff-affected goods”. In other words, exporters are not eating any of the costs and other folks are opportunistically raising prices – imagine that.
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Navarro had a hard time responding to Wallace because the facts are the facts and when presented with incontrovertible evidence, administration officials often struggle to reconcile the president’s narrative with reality (and you should note that in some cases, that’s not the officials’ fault – not everyone who works at this White House is as culpable as Navarro in the trade war).
On Friday, Goldman was out with a fresh look at the issue and an update to the chart Wallace used to press Navarro last week.
“The left panel of Exhibit 1 shows that consumer prices in categories affected by tariffs—targeted at China or specific products such as washing machines—have risen at a faster pace than consumer prices in goods categories not facing tariffs, a departure from the trend prior to tariff imposition”, the bank writes, recapping earlier research and noting that “US producer prices in tariff-affected categories have also risen more quickly, suggesting that domestic producers have been able to raise their prices because of the protection from Chinese competition”.
Ultimately, the tariffs have raised YoY core PCE inflation by between 10 and 15bp. The impact on core CPI has been similar.
Goldman uses their approach to estimate the impact of the prospective next round of tariffs.
Applying the methodology (which the bank details at length in the full note) to the threatened 10% tariff on $300 billion of imports from China (which will begin on September 1, according to Trump’s tweets) implies a 20bp increase to core PCE inflation. Goldman goes on to say that “if the White House were to escalate further from a 10% to a 25% rate, that would add another 30bp, for a total further boost of 50bp”. (That isn’t Goldman’s base case.)
The bank goes on to say that if you break down customs revenue by category, the money taken in from tariffs on consumer goods likely won’t offset the impact to US consumers.
“The cost to consumers likely exceeds tariff revenues from consumer goods, which we estimate at about $5-7 billion so far and another $15-20 billion to come, because of the spillovers to prices charged by non-Chinese producers in tariff-affected categories”, Goldman writes. Again, opportunistic price increases are at work.
The bank also notes that at least some of the tariff costs on intermediate inputs and capital goods might start to work its way through to consumer prices”. The chart above shows what kinds of goods have been subject to tariffs in each successive round.
Is any of this likely to represent a catastrophic body blow to the US consumer? Well, no. And Goldman certainly doesn’t pitch it that way.
Rather, the point is simply to say that the White House isn’t telling the whole story, and when you consider that the US economy lives and dies by consumer spending, slapping tariffs on consumer goods is precarious. Especially this late in the cycle.