Why Aren't Higher Tariffs Raising Prices? — October 20, 2025
Hello, and welcome to the Economic & Market Watch podcast for the week of October 20, 2025. This is John Suter of CFC. Because economics isn't an exact science, sometimes things happen that don't seem to make sense until we analyze the data. There are at least two big things out there right now that don't make a lot of sense on the surface: Tariffs don't seem to be contributing to inflation in a significant way like we initially feared, and the S&P 500 keeps hitting record highs in a challenging environment. I want to talk to you about both, so I'm going to tackle tariffs today and the mighty S&P 500 next Monday.
John Suter:Let's take a look at our first perplexing economic phenomenon.
John Suter:Inflation peaked during June 2022 at 9.1%. (Remember when a dozen eggs were topping over $6 a carton?) It has since come down — quite dramatically — to 3.1%, based on the core CPI, but it seems to be somewhat sticky at 3.1, not coming down any further.
John Suter:Then came the tariffs — the rate importers must pay at the border for imported goods. Tariffs were the talk of the world at the start of the year. Yet despite the barrage of new tariffs imposed by the Trump administration this year on dozens of US trade partners, the price of goods and services had defied many experts' expectations and remained relatively stable. Now, economists caution that just because tariffs have yet to trigger a renewed bout of inflation, there is no guarantee that prices won't surge during the remainder of this year. But why haven't we seen that rise in prices in inflation data so far? You'd think that we would have seen some significant jump in inflation, but that hasn't happened.
John Suter:Basically, there are four reasons, and we're going to cover them in today's podcast. Number one, retaining market share. This is front and center for many businesses. Market share is hard to build but easy to lose. Companies often try to hold off on passing along higher costs to customers to avoid losing market share to rivals. Number two, retailers swallowing the costs. Retailers have to think about market share and customer loyalty. Public perception matters a lot. The first company to raise prices could be the first company to make customers unhappy. Right now, many retailers are eating the additional tariff costs. Most economists believe this isn't a sustainable outcome over the long term. As retailers obtain more clarity on tariff rates in the next year or two, expect more firms to raise prices.
John Suter:Number three, overestimating costs. Depending on when you were doing your budgets this year, you may have been planning for a different rise in cost. Many economists were forecasting a rise of 15% earlier this year, right after the president's initial announcement of new tariffs. The average tariff rate on US imports so far this year though was only 9%. Even though economists missed this one on their forecasts, one can't really blame them. The tariffs were applied and then extended and then reapplied for a quickly changing slate of affected countries. Also, the major focus of the president's tariff policies are squarely aimed at roughly 20 economies, ones that conduct the majority of trade business with the United States. Number four, US companies being proactive. Many companies stocked up on goods inventory before the higher tariffs kicked in. Higher inventory levels allowed companies to sell non tariff products, which ultimately allows them to delay price hikes. In economics, it's called the bullwhip effect — remember when Harrison Ford brings the whip back in Raiders of the Lost Ark? That buildup in inventory takes time to work through. That pushes out company price hikes for goods impacted by tariffs, but eventually, the tail of the whip is coming. All of these reasons lead to a gradual boost over time. Tariffs typically take many months to seep into company supply chains and show up in prices consumers pay at the store. The full impact of tariffs plays out not immediately, but over an extended period of time, peaking roughly a year after they take effect. That means any U.S. tariffs imposed this year would be unlikely to have much of an impact on inflation until later this year and into 2026.
John Suter:A couple more thoughts about American spending. In a rising price environment, shoppers look for ways to stretch the dollar further. Discount stores often see a bump in sales during these times, but they're under pressure too because of the tariff products that they
John Suter:sell.
John Suter:Dollar General is a prime example of that kind of retail shop, one of the ones consumers are going to turn to in order to get better deals. If you Google Dollar General's second quarter earnings release, the report highlights each one of these key factors as having an impact on their operations.
John Suter:Who would care? Well, both Dollar General customers, when inflation or shrinkflation finally kicks in, and stock investors when earnings start to suffer.
John Suter:Speaking of stocks, we should talk about the magnificent year the S&P 500 is having in 2025. Come back next week to hear about that one.
John Suter:That's it for today. As always, we thank you for listening, and be sure to download the Economic & Market Watch dashboard and intelligence brief. We'll talk to you soon.
