Price increases to consumers are slowly filtering into the economy after being muted the first quarter of 2025. Remember all of the advance purchases businesses and consumers made before tariffs hit earlier in the year? Well, inventories are being depleted which means some businesses have begun passing on those higher replacement costs to consumers.
Inflation
Inflation increases are wide spread but especially from imported items from toys to appliances. One of the biggest increases (1%) was in fruit and vegetables with 60% of fresh fruit and 35% of vegetables coming from abroad.
Steel, aluminum and oil imports from Canada will hit Midwest manufacturing, autos and fuel for cars, trucks and industry.
Tariffs
While collected tariffs are increasing under the new tax bill, the expected revenue comes in around $300 billion vs a $1.9 trillion projected deficit; a paltry 15% of what is being spent. This will mean larger future Federal deficits and costs to service that debt since interest rates will rise if these policies continue.
All of this activity will more than likely take a rate cut by the Federal Reserve off the table until later in the year.
Corporate Earnings Pressure
In addition, with higher input costs, I expect corporate earnings to come under pressure in the near future which may mean employment numbers, which are already softening, turn negative. Ford reported it paid $800 million in tariffs from its foreign parts plus aluminum and steel causing its first quarterly loss since 2023.
Currently, the US Yale Budget Lab estimates higher tariffs facing the US consumer of 18% additional cost and forecast a -0.7% reduction in 2025 GDP (gross domestic product).
Takeaway:
While businesses were able to make advance inventory purchases to both boost first quarter economic numbers and shield consumers from tariffs and higher prices, those practices are coming to the end. So far, the administration seems intent on a minimum 15% tariffs on all trading partners.
Please let me know if you have any questions.
Chris
