Who will pay for Trump’s tariffs?

The past week saw US inflation moderate in April, but everyone ignored the figures.

Instead, attention was on signs that inflation is coming to the US. Whether asked by business leaders, importers, academics or officials, the question is: who will pay for Trump’s tariffs?

This is both a theoretical and practical question, so let’s look at the initial evidence.

Business

Ultimately, economists can have all their fancy models and theories, but companies will be the players changing prices. So it is good to ask them.

Doug McMillon, chief executive of the world’s largest retailer Walmart, spoke out last week, saying there was no way of getting around the effects of higher tariffs.

“We will do our best to keep our prices as low as possible, but given the magnitude of the tariffs, even at the reduced levels announced this week, we aren’t able to absorb all the pressure . . . The higher tariffs will result in higher prices,” he said.

The comments threw Trump into one of his frequent rages on social media. The president told Walmart to “STOP trying to blame tariffs for raising prices”, and instructed it to “EAT THE TARIFFS”, adding ominously that “I’ll be watching”.

Trying to soothe tensions on Sunday, Treasury secretary Scott Bessent moderated the president’s language, saying McMillon had assured him the retail group would “eat some of the tariffs”. Notice how hard the word “some” is working in this reformulation.

Moving away from single company anecdotes to data, the Philadelphia Fed released its latest survey in the past week on its district’s corporate pricing intentions. The results, shown below, suggest that most companies think they are being charged more for supplies, and are themselves setting higher prices. It is not a comforting chart.

Exporters to the US are not eating the tariffs

After Trump’s Walmart outburst, he suggested the US supply chain should absorb the tariff increases. This is new from the president. Previously he claimed that exporters to the US would lower their prices in response to higher tariffs, so the real incidence of the levies would be on foreigners. Evidence suggests otherwise.

On Friday, the latest data on US import prices was published by the Bureau of Labor Statistics, showing a slight rise in the prices of goods arriving at US ports in April. These prices exclude tariffs, so should be falling significantly if the burden of duties falls on those outside the US. The chart below suggests the tariffs will get passed into the domestic supply chain at the very least.

The eagle-eyed will notice something of a fall in the price of Chinese goods landing at US ports in April, where the tariff increase has been greatest. The price reductions are not unusual for goods imported from China and not large enough to offset the tariff increases. But there might be some effect at work.

Breaking down the Chinese import prices by product type, there is no particular pattern. The one exception is a 5 per cent fall in prices of communications equipment over the past three months, a category that often sees price reductions. Of course, this product type was one of those exempted from “reciprocal” tariffs on April 12, so it is very difficult to make the argument that foreigners are taking the pain.

Academics

The academic work from the 2018 tariffs suggested that the US paid, but much of the costs were borne within the US supply chain. Below I will point to new research carried out at the Fed that disputes the claim that consumers did not pay.

First, the researchers who produced much of the academic evidence from 2018 are now publishing an almost real-time indicator of the tariff effect on prices charged using data scraped from retailers’ websites. In the research, Alberto Cavallo, Paola Llamas and Franco Vazquez take the prices of products, use artificial intelligence to determine the country of origin and compare this with the tariff rates.

It is early days, but you can see announcement effects of tariffs in the data. The authors are correct to say there have been “rapid but still relatively modest” consumer price effects. Perhaps that is to be expected, given the extensive front-running of tariffs we saw in first-quarter import data. Unsurprisingly, costs of goods from China are rising the fastest and, as suspected in 2018, the price rises extend beyond products that face tariffs. It seems that retailers like to spread the pain.

Officials

For Trump, further unhelpful evidence on whether the US supply chain would eat the tariffs has come this month from the Fed. In a staff note, which does not reflect Fed policy, economists Robbie Minton and Mariano Somale undertook a theoretical exercise to predict where in the inflation figures the 2018 duties on China would show up, assuming full pass-through of prices. The research is heavy on the use of input-output data, tracing the tariff effect through the supply chain.

The theoretical predictions suggested that musical instruments would rise in price the most due to their heavy tariffed import content, for example. And that there would be little price effect on pharmaceutical products. They found a good relationship between their predictions and actual price changes, with one big discrepancy. As the chart below shows, the actual price changes in each category ended up being twice the level of the theoretical predictions.

The US supply chain had not eaten the tariffs, but had used them to add a bit of extra profit. This shows the opposite of the 2018 research led by Cavallo. The Fed officials think their data and techniques are more comprehensive and, not being based only on web-scraped data, “more representative of the US economy”.

The researchers then turned their attention to the 2025 tariffs. It is still early days, but again their predictions on where tariffs on China will show up in US inflation are proving quite accurate. With data up to March they find that, in contrast to 2018, the pass-through is running at 54 per cent. So US supply chains have initially eaten up some of the tariffs.

Before Trump jumps up and down with glee, they note the results are preliminary, with tariffed goods not yet in the inflation figures. They also note that their input-output data is out of date and Chinese imports have fallen sharply. So it would be unwise to say the duties are likely to be absorbed.

The results will develop over time. So far, this Fed study suggests 0.1 per cent of the rise in US core PCE prices has come from tariffs. Not a lot, but it is early days.

So, who pays for the tariffs?

Trump likes to claim that foreigners or greedy business leaders will pay. The evidence suggests he is wrong about them hitting foreigners. As far as the domestic burden, I’ve compiled views about who pays in the table below.

What I’ve been reading and watching

The Fed is anxious to be seen as a “responsible steward of public resources”, so is planning to cut staff levels by 10 per cent in a scoop by Claire Jones.

Still on the Fed, it held a conference last week to examine its monetary policy strategy. Chair Jay Powell’s speech confirmed that flexible average inflation targeting was likely to go. The rest of the papers can be read here.

We need to take US consumer confidence data with a pinch of salt, but it is still falling.

A former hawkish member of the ECB governing council, Belgium’s central bank governor Pierre Wunsch turns dovish in an interview with the FT.

A chart that matters

Have you ever wondered whether the sentiment in the FT’s reporting and commentary accurately reflects what is happening in the world? Of course you haven’t, because you know that the FT is the world’s best business newspaper.

But over at the FT’s Monetary Policy Radar, we have undertaken a systematic analysis of the FT’s coverage, using its archive, a large language model, and rather clever filtering and embedding techniques to ensure we do not confuse an effusive restaurant review for commentary on the global economy.

The “macro mood” in the FT’s output does indeed reflect what is happening in the world (phew). We think it might also have some predictive power, though that needs further work.

Clarification

I am happy to clarify that Monetary Policy Committee member Megan Greene was referring to the 2021-23 spike in inflation when I quoted her as saying the coming inflation hump will be “way smaller”.