Higher tariffs have had a modest effect on overall inflation thus far. The Consumer Price Index wasup 2.7% on a year-ago basis in June—a softer pace than at the start of the year. The limited change inthe inflation picture comes despite the Trump administration having started to roll out higher tariffsin February. After several escalations, delays and negotiations, we estimate the effective tariff rate isroughly 16% today, up from 2% in 2024 (Figure 1).As a reminder, tariffs are a tax on goods paid by U.S. importers. There are a few ways the cost can bedistributed, as we discussed in a report earlier this year. Domestic firms can pass it along via higherselling prices, absorb it via profit margin compression or a combination of the two. Yet, even beforeproducts arrive at U.S. docks, foreign suppliers can also indirectly shoulder higher tariffs by loweringtheir list prices to ameliorate the total cost burden faced by domestic firms. Exporters may provide such relief to maintain market share.

In June, import prices excluding fuels were up 1.2% year-over-year and running at an annualized rateof 1.9% over the past three months (Figure 2). The lift has not been driven by tariffs themselves. Sincethe Import Price Index is primarily used to calculate the inflation-adjusted value of imports in GDP,it excludes tariffs from the prices paid by importers because the income generated from tariffs istransferred to the federal government, not the importing firm.If foreign exporters were absorbing the cost of tariffs, import prices would be declining in proportionto the rise in the tariff rate. A look at import prices through June, however, shows prices excluding fuelmarginally higher, rather than lower, where they would have been had they continued to rise in line withtheir recent trend (Figure 3). Thus, the recent rise in import prices points to foreign suppliers generallyresisting price cuts.

Underneath the surface, some of the recent strength in import prices has been driven by skyrocketingprecious metal prices, especially for gold and silver, as elevated uncertainty has supported demandfor safe-haven assets. Beyond metals, import prices for food, non-durable supplies & materials anda selection of consumer goods are also running ahead of their recent trends, suggesting foreignexporters are not shouldering the cost of higher tariffs on these products (Figure 4). Weaker autoprices relative to trend, on the other hand, likely reflect some foreign exporters discounting prices in aneffort to move inventory in the face of sluggish domestic sales recently.Across categories of import prices, roughly half are running below their pre-tariff trends, while theother half are in line with or above those levels. The mix is reflective of variations in product-specificand country-level factors, with half of all import price categories having risen in price since the start ofthe year.

So why is overall import price inflation holding up? For one, the scramble for imports ahead of newtariffs strained global supply chains and led to a pickup in shipping costs that foreign exporters couldhave baked into their prices depending on the nature of their trade contracts. The dollar's slide has alsoplayed a major role. Approximately 95% of the nation's imports are denominated in U.S. dollars, and the Federal Reserve's trade-weighted dollar index is down 6.3% since the start of the year and 2.5%from a year ago (Figure 5). The broad depreciation has likely incentivized foreign suppliers to bump uptheir invoice prices, as dollar-denominated revenues are not stretching as far when translated to theirhome currencies.With little relief from import prices, domestic firms are stomaching the cost of higher tariffs andstarting to pass it on to consumers. Excluding vehicles, the core goods CPI posted its strongestmonthly increase since February 2022 in June, with widespread gains across furniture, apparel, motorvehicle parts and recreational items. U.S. firms also appear to be absorbing some of the additionalproduct cost brought on by tariffs. The trade services component of the Producer Price Index, whichis a measure of product margins for wholesalers and retailers, has slowed sharply in recent months,illustrative of margin compression (Figure 6).Looking ahead, import price growth has room to weaken but is unlikely to plunge. Foreign purchasingmanager surveys indicate weaker manufacturing activity in Canada and China since the beginning ofthe year, but stronger activity across the Eurozone and Mexico. The mix suggests some exporters maybe amenable to cut prices while others may be inclined to hold the line. Although softer consumerspending in the United States could weigh on foreign production and encourage more exporters to cuttheir prices in the second half of the year, our expectation for the dollar to continue weakening overthe same time frame will likely counteract the deflationary impulse from weaker demand. In short,import prices are unlikely to be a relief valve for consumer price inflation in the months ahead.