To recap, the tariff policy of President Trump is expected to be inflationary for the US and neutral to perhaps mildly disinflationary for other countries (e.g. cheap Chinese exports being rerouted to the rest of the world, recent US dollar appreciation etc). The key sectors in the US that had been expected to boost the inflation numbers via tariffs were: new and used cars, apparel and durable goods.

The challenge for economists lies in forecasting the degree and timing of tariff pass-through in the US to consumer prices and hence to the monthly inflation figures. The forecasting community (i.e. inflation strategists / economists) appear to have followed roughly the same, very simplistic approach.

Anchoring to the experience of tariffs in 2018-19 on a small handful of products (e.g. washing machines), the rule of thumb that many have used is that 60% of the tariff shock will be passed through to consumers over a period of roughly three to five months. Some estimates were even higher: Goldman Sachs assumed “that 70% of the direct costs of tariffs would fall on consumers” and that the total would rise to about 100% when combined with spillover effects to prices charged by domestic producers who benefit from protection from foreign competition.¹

Based on this assumption, it was always this summer’s inflation data releases in the US which have been keenly watched for signs of tariff inflation.

And it is here that conviction is beginning to wobble: with a miss to the downside on inflation last month (in theory the first potential month that some initial signs tariff inflation could have been seen) and, in the last week, downgrades to expectations of June inflation which is due on July 15th. This most recent downgrade was driven by Adobe price data which showed much weaker apparel prints as well as Nielsen data on shop prices that showed a much lower pass-through in affected areas.²

The net effect is that consensus on the timing of tariff pass-through is beginning to be pushed out by a number of months, but the peak of the core inflation shock is only being adjusted modestly downwards. For reference, the Federal Reserve has already pencilled in a surprisingly low core PCE of 3.1% for Dec 2025 in its June quarterly forecasts.³ This is a low bar to beat with inflation strategists like Alan Detmeister at UBS assuming 3.5%, Goldman Sachs at 3.3% etc.⁴

Factors to consider

So what is going on and should we conclude that tariffs are not as inflationary as economists have assumed?

Timing
Perhaps it should be no surprise that the timing of pass-through is taking longer in this instance. Front-loading of imports seemed to be a bit larger and the uncertainty on the tariff rate and coverage could lead more firms to work through inventories before raising prices. In addition, large firms might not want to get Trump’s ire, so they could spread the price changes slowly over a year or so, rather than a big one-time boost.

Scale
It is also the case that in certain industries (e.g. sports apparel), the industry competitive dynamics are far more intense than previous years, resulting in firms and their suppliers potentially absorbing more of the tariff effect in their own margins rather than passing it directly through to consumers. A recent KPMG survey showed that 57% of companies said they were already experiencing a tariff-driven decline in gross margins as of May. If higher prices haven’t shown up for customers yet, the survey makes it clear that they’re coming. 77% of respondents said their companies are considering price increases of at least 5% in the next six months^.5

How executives say tariffs have impacted their company’s gross margins

Source; KPMG Tariff Survey, May 2025.

So, it is too early for inflation strategists to be concluding that tariffs will definitively be less inflationary than they have assumed, but the timing process of pass-through does appear to be different this time. New car prices are a great example of this, and CNN actually wrote a  helpful article on the dynamics of industry pricing, concluding that price hikes would likely come later in the year.⁶

With a sample size of one (the 2018-19 experience), there was always huge scope for economist revisions. We continue to monitor and listen to our equity and credit analysts’ feedback on pricing power from the key affected sectors as this will be the key determinant as to whether the SCALE of the inflation shock is in line or differs from industry assumptions. For now, consensus estimates retain a chunky month-on-month inflation print for July (which will be released in August) – the first real tariff month in forecaster estimates – but it is important to monitor how these expectations change in the coming weeks.

Given the weak base effects rolling off from last year, inflation on a year-on-year basis will continue to rise in coming months and only weak employment will help drive more interest rate cuts than are currently priced in.

¹Source: Goldman Sachs, US earnings will start to show the impact of Trump’s tariffs, 3 July 2025.
²Source: Adobe Digital Price Index, year-on-year changes to June 2025; UBS, Grocery store prices slow in 2nd half of June, Nielsen data to 28 June 2025, 8 July 2025.
³Source: US Federal Reserve, Summary of Economic Projections, 18 June 2025.
⁴Source: Goldman Sachs, 8 July 2025.
⁵Source: KPMG, Tariff Business Impact: What executives think now, June 2025.
⁶Source: CNN, edition.cnn.com/2025/06/16/business/car-prices-tariffs-impact, 16 June 2025.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.