Donald Trump, the incoming president, has pledged to lower the cost of groceries, rent, and other essentials.
Although their policies can have an impact, U.S. presidents usually have no direct control over the pricing of any of those items.
Economists believe that tariffs, or import taxes, are one of Trump’s plans that might have a big impact.
Why Trump’s tariffs might hurt prices
Trump promised on Monday to put new tariffs on the United States’ top three trading partners, China, Canada, and Mexico, as soon as he takes office on January 20.
As part of a pressure campaign to stop immigration and the illegal drug trade, the Republican announced that the new tax for goods coming from Canada and Mexico would be 25%. Trump had previously pledged a 60% tariff on goods from China, and now he is proposing an additional 10%. Additionally, he has suggested imposing duties on other goods ranging from 10% to 20%.
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Trump claims that his initiatives would restore American manufacturing jobs. With more costly automobiles, appliances, and technology, Trump’s policies, according to economic analysts, will put a strain on American families’ finances.
According to Wayne Winegarden, senior fellow in economics at the conservative Pacific Research Institute, more tariffs will result in higher prices for both domestically and internationally manufactured items.
“Cars will cost more because we import the steel used to make them,” Winegarden added. Prices can be rising.
According to Winegarden, the tariffs would hurt the economy because they are a broad-based consumer tax.
According to him, the severity simply depends on the rates, and there will also be repercussions in terms of how other nations react. Even if they don’t reply, I believe it’s crucial for people to understand that we’re still hurting American households even if no one raises their tariff in response.
Even in the absence of tariff retaliation, households would be affected by an extra $2,421 in 2023 dollars in a scenario involving a broad 10% tax and a 60% China duty, according to the Yale University Budget Lab, a nonpartisan research organization.
How about inflation?
Even if inflation has gradually decreased from a peak of 9.1% in June 2022, many voters in the presidential election were still quite concerned about the state of the economy.
62% of voters who were registered to vote in October stated that the economy was doing poorly.
However, according to economists, it is improbable that prices would generally return to their levels during Trump’s first term. Price reductions of that magnitude would probably be the consequence of a faltering economy.
According to economist Lauren Saidel-Baker of ITR Economics, a neutral economic research and consulting business with headquarters in New Hampshire, inflation will continue to decline through the end of the year before increasing again in the early months of the following year.
Saidel-Baker claimed that because the money supply is growing and transactions are happening more quickly, she had this expectation prior to taking Trump’s plans into consideration. However, one of her primary worries about how Trump’s policies may impact inflation in the upcoming year is tariffs. She claimed that while inflation in the products sector is currently under control, the services sector is more severely affected by it due to a more competitive labor market. The Trump administration may see a resurgence in goods inflation.
Goods may catch up as a result of tariffs. However, the labor market will remain tight due to our long-term demographic issues. “If we do things like these mass deportations that are going to cut from the working-age population, I don’t see service inflation getting materially better,” Saidel-Baker stated.
What we know from previous tariffs by Trump
Trump levied taxes on imports of solar panels, washing machines, steel, and aluminum during his first term in office. China was among the nations that retaliated with tariffs.
According to the Tax Foundation, a think tank that studies tax policy, Trump’s tariffs increased employment in the steel and washing machine industries, but they also caused a 0.2% decline in the long-term GDP and the loss of 142,000 full-time jobs.
From his first term, we already have proof of what his tariffs will accomplish. And they’re not good. Winegarden stated that it did not do what he claimed they would.
According to Marshal Cohen, chief industry analyst at market research firm the NPD Group, several businesses have already shifted their production from China as a result of Trump’s initial tariffs. In an earnings call, Steve Madden CEO Edward Rosenfeld revealed that the firm is putting a plan into place to lessen its need on China, which accounts for over 70% of its imports.
According to Cohen, even with this change, some products—like technology, automobiles, appliances, and toys—that are based in or have close ties to China may be more vulnerable to tariffs.
How companies will respond
In anticipation of tariffs, companies like Stanley Black & Decker, AutoZone, and Columbia Sportswear have stated that they will increase their pricing.
In an earnings call, Philip Daniele, CEO of AutoZone, stated that if tariffs are imposed, the price of the tariffs will be passed on to the customer.
The amount that businesses feel comfortable raising prices is dependent on how much sales decline, according to Isabella Weber, an associate professor of economics at the University of Massachusetts Amherst and a recent co-author of a paper on business pricing strategies.
It has been observed that businesses were prepared to raise prices even if doing so resulted in a decrease in sales volume. According to her, a decline in demand does not always mean that businesses should not raise their pricing. Naturally, if sales decline too much, there comes a moment at which more price increases no longer boost the bottom line. That goal could have been achieved in some segments, particularly those where low-income households are significant consumers, such as fast food.
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