Shortly after sitting back down at the resolute desk, President Donald Trump began a program of imposing tariffs to encourage negotiation and to correct trade imbalances. Some were small. Some were huge. Many were later reversed or challenged in court. Economics 101 suggests that tariffs are a tax and should produce both inflation and reduced consumer spending. This time has been different, and financial professionals need to wrestle with why.
There is no single answer, but several forces play a role as this story unfolds. They include average tariff rates, businesses absorbing the costs, natural lags, substitution in procurement supply chains, the drivers of inflation, and resiliency in consumer demand.
We have all read the attention-grabbing headlines that Trump is imposing an additional 100% tariff on China (or similar). The reality is that many of the headline percentages are either adjusted, delayed, or eliminated before the deadline. However, some are realized. The average tariff rate charged in America is currently 9%. That is far less scary than is broadcast by some outlets. According to CBS News, roughly 48% of imports have an associated tariff. There are lots of exemptions based on requests from key industries and side deals made.
Another element keeping tariff inflation in check is businesses absorbing the costs. The Federal Reserve’s Beige Book from July 2025 showed that while input costs are rising, prices charged to consumers are not rising to the same degree. In other words, companies are hesitant to raise prices if the tariffs are reversed through either negotiation or litigation. This is especially true in competitive sectors like electronics, apparel, and consumer goods, where raising prices risks losing market share. The Federal Reserve and Goldman Sachs estimate that businesses have absorbed between 20% and 40% of the impact of the tariffs so far. This will not go on forever. Once the status of the tariffs is known with more certainty, we may see prices rising, which would impact inflation and consumer spending.
There may also be an inventory buffer that introduces a lag to the inflationary effect. Many businesses stockpiled pre-tariff imports. They will eventually work off this inventory buildup and need to reorder products at higher tariff-adjusted prices. Bank of America notes that inventory levels are still lean overall, but there is evidence of a buildup due to the tariffs. The buildup is most noted for cars, general merchandise (e.g., Walmart, Costco, etc.), and construction supply stores (e.g., Lowe's and Home Depot). The apparel industry did not stock up, and food sectors can only store so many perishable products at a time.
Many savvy businesses chose to adapt to the uncertainty. They re-routed trade through countries that have lower tariffs. While one goal was to onshore jobs in America, this takes time measured in years. Strategic supply chain sourcing can help mute the effect of tariffs while we all figure out what is staying and what is not.
The three primary drivers of inflation have been housing, energy, and food costs. Housing is not really impacted by tariffs (except through construction materials). Energy inflation is being driven by demand for AI-linked data centers, not tariffs. Food costs are somewhat linked to tariffs, but exemptions are possible.
The big news is that U.S. consumer behavior defied expectations. Rather than pull back spending in response to higher prices on a narrow sliver of goods, households maintained consumption levels, buoyed by rising wages, a strong job market, and a wealth effect from rising asset prices. The elasticity of demand for many affected goods also proved lower than expected. For instance, if the price of a washing machine rose by $50 due to tariffs, many consumers were willing to absorb the increase, especially if they viewed it as a one-time or politically motivated event. Credit card data points to signs of potential stress building for this segment of the economy. A little over 11% of consumers are making only minimum payments on their credit cards. This does not sound too bad, but it is enough to have a potential impact with a lag. CNBC tells us that those delinquent 90 days or more recently hit a 12-year record. Delinquency rates (30+ days) are a little more than double what they were in 2021. Another element is the two-tier economy. Those making more than $100,000 per year have a vastly different experience from those making less.
Financial professionals should understand a few key takeaways. First, the tariffs have not produced the inflation that classical economics expected (yet). Second, businesses are eating a good portion of the tariff costs while they wait to see what is removed through negotiation, legislation, or litigation. Third, consumers have been more resilient than expected. The elasticity of demand has been more flexible than anticipated, but it may be reaching its limits. Fed policy remains accommodative, but the true effects may appear with a lag, beginning to show up in 2026. Time will tell, but you now know some talking points for clients and items to watch moving forward.
Author: Eric Robbins is the Associate Director for Corporate Outreach and Research and Associate Teaching Professor in Finance at Penn State Erie, the Behrend College.
Editor: Greg Filbeck, CFA, FRM, CAIA, CIPM, PRM, Samuel P. Black III, Professor of Finance & Risk Management, Penn State Erie, mgf11@psu.edu.