How Much do Tariffs Cost Consumers?

Five days after implementing tariffs on $34 billion worth of imported Chinese goods, the Trump administration released a list of an additional $200 billion worth of Chinese imports that will be subject to a 10 percent tariff. On the day of the announcement, stocks slid, but only by about a half of a percent. By the end of the week, it seemed like investors had forgotten about the announcement and instead were focusing on corporate earnings and the strength of the economy.

That may seem strange, considering that this next round of Trump tariffs includes items that could more directly impact consumers – everything from food products (seafood, frozen pork); personal care items (shampoo, soap); accessories (handbags, luggage, gloves--even baseball gloves); electronic equipment and appliances (digital cameras, television components,  refrigerators); and certain automobile parts, including tires.

Maybe investors are convinced that the tariffs will not derail either growth or cause a big problem for consumers. Underscoring that later point, an analysis by the New York Times found that for the $80 billion in tariffs that have already been enacted, the average American household will pay about $60 bucks and if you exclude certain one-time items, like washing machines and solar panels, the amount drops by nearly half. Even if the newest round of penalties on $200 billion goes into effect this fall, total annual costs for the average American family would rise to $127. Economists caution that these numbers are rough estimates and that the impact of tariffs does not fall evenly across the population, but it appears that the impact may not be all that great.

But taken with last week’s inflation data, there’s no escaping that prices are rising and tariffs will only add to that upward pressure. As of June, headline CPI increased to a fresh six-year high of 2.9 percent from a year ago. Core CPI (excludes food and energy) was up 2.3 percent from a year ago, a 15-month high.

The only good news from the report is that early indications suggest that Social Security beneficiaries could see their biggest cost of living adjustment (COLA) in a decade. CPI-W, which is the basis for next year’s COLA adjustments, was up 3.1 percent in June. While we still need data for a few more months, it looks like Social Security COLA will probably be over 3 percent, which would be the largest annual increase since 2008. Retired Americans saw a COLA increase of 2 percent this year, 0.3 percent in 2017 and no increase at all in 2016.

Federal Reserve Chairman Jerome Powell will outline the central bank’s view on – and potential response to – inflation when he delivers his semi-annual testimony to Congress this week. In the mean time, investors will be focusing on corporate earnings. Q2 profits at S&P 500 companies are expected to be up 20 percent from a year ago, according to FactSet), which is one of the main reasons that stock prices have remained fairly strong.  

AND ABOUT THAT FLATTENING/POTENTIALLY INVERTING YIELD CURVE

The yield curve is a way to compare short-term interest rates (the federal-funds rate) and long term interest rates (the 10-year U.S. Treasury bond). You would normally expect yields to be higher when you lend money for a longer period of time, but when investors think that the Federal Reserve will have to raise short interest rates to combat rising prices (inflation), the curve flips and becomes “inverted,” meaning that short-term rates are higher than longer term ones. In the past, curves become inverted just prior to recessions. That’s why you may have read a few headlines that say something like, “THIS INDICATOR IS FLASHING RECESSION!”

While the current yield curve is flattening (the spread between long and short is at a decade low), it has not yet inverted. If it does – and a recession was to follow, it would mark the eighth time in a row that this indicator accurately predicted a recession and a bear market in stocks.