4 Major Questions Are Lingering About Tariff-Related Inflation

It’s tough to forecast the economy these days, but one thing is sure: prices on some goods are going up.

Tariffs haven’t yet pushed up official measures of inflation, but economists say that’s certain to change soon as Walmart, Macy’s, and smaller businesses raise prices on imported goods. Even so, airfares, hotels, and gasoline prices are dropping, and there are signs that rents are peaking after years of hikes. 

Wall Street analysts and D.C. policymakers are debating how noticeable the tariff-related sticker shock will be and what items will be most affected. With tariff headlines changing by the day, the inflation outlook is “unusually uncertain,” Barclays economist Marc Giannoni wrote in a recent note to clients.

The answer to how high inflation is headed may vary on any given day. But below are four questions that are driving the debate.

Will Companies Eat the Tariffs?

President Donald Trump has said companies should “eat” the tariffs, taking a hit on their profits rather than passing costs onto customers and driving up inflation.

But if a megaretailer like Walmart felt forced to raise prices, smaller ones with thinner margins and less negotiating leverage may feel more pressure, said Richard Moody, chief economist at the Alabama-based bank Regions Financial.

It may take time for that to happen, since retailers are still selling their existing inventories—and some bulked up ahead of tariff uncertainty. But economists expect consumers to feel a bigger hit nonetheless.

“The jury is still out if retailers and wholesalers will pick up much of the tab, but we remain comfortable for now with our working assumption that something like 80% to 90% of the tariff costs ultimately will be passed on to consumers,” Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a note to clients.

Will Disinflation in Services Soften the Blow?

While some imported goods may get pricier, consumers tend to spend more on services such as restaurants or travel. Services make up roughly two-thirds of consumer spending, noted Regions’ Moody, who foresees more deceleration in service prices ahead.

“That’s going to mitigate some of the impact from rising goods price inflation,” Moody said, though he noted that may be of little comfort to lower-income households that spend less on travel.

Another possible mitigator is housing costs. Those make up a large chunk of inflation gauges, and while housing remains expensive following a post-COVID boom, rents have started to fall in some markets. 

Overall, service prices should “remain relatively subdued,” Oliver Allen, an economist at Pantheon Macroeconomics, wrote in a note to clients. But he doubted they’ll prevent an overall increase in inflation.

Will Inflation Be One-Off or Persistent?

Inflation may lead to a one-time hit to Americans’ pocketbooks, but the effects are more painful if higher prices feed off each other and become persistent.

Goldman Sachs Economist David Mericle wrote he’s skeptical about the latter scenario, expecting a one-time jump that pushes inflation gauges above 3.5% before coming back down. While the post-COVID bout of prolonged inflation is fresh in consumers’ minds, this year’s inflation rebound will be “less threatening than the 2021-2022 episode,” he wrote.

At the time, supply chain snarls led to a spike in prices, all while consumers had elevated spending power from stimulus assistance, he noted. But the economy looks different today, with GDP expected to grow at a measly pace of 1% this year and the unemployment rate potentially drifting higher.

Will Inflation Expectations Lead to a Wage-Price Spiral? 

Economists say wages are critical to determining whether inflation will be one-time or prove stickier. 

When consumers expect inflation to rise, they tend to seek higher pay from their employers. Those companies then may pass on some of their higher labor costs to consumers, raising prices on the goods and services they buy.

If that dynamic stays in check, inflation can rise without causing massive problems. However, one fear is a wage-price spiral, which the U.S. experienced in the 1970s. This spiral only ended after the Fed hiked rates aggressively and brought about a recession.

“A pickup in wage growth would be a crucial intermediate step for high inflation to become persistent, but so far as the trade war has gotten underway, anxiety about the outlook appears to be outweighing any boost from higher inflation expectations,” Goldman Sachs’ Mericle wrote.