Back Economics

There is something happening here, though what it is ain’t exactly clear

Published on July 30, 2025

Gerard MacDonell

I’m old. Sorry.

The idea that there has been no effect from the tariffs so far has struck me as factually mistaken, although we can always argue about how things will play out ultimately. People may be inferring the inflation backdrop from how the equity market has been performing. Alternatively, they may be mistaking technical issues in air fares, financial services, and medical prices as somehow evidence that tariffs don’t matter. My own take is that underlying inflation has inflected higher in response to the tariffs. It is not a disaster, but it does mean that the Fed will insist on — rather than quickly ease into — evidence of a moderation in demand growth.

In any event, the most recent news on the actual path of the effective tariff rate has been marginally to the hawkish side. Julia Coronado has provided us a useful update on the effective rate through June. And it is about a percentage point higher than I had assumed based on a preliminary read a couple weeks ago. I am not saying this is market moving news. Perhaps I was behind the curve. I am saying I need to update. As of June, the effective tariff rate looks to be about 750 bps above its value in March (2.6%) and 770 bps above its 2024 average (2.4%).

According to BLS data, which I covered in note last week, pre-tariff import prices have been trendless in recent months. And if we take trendless as the pre-tariff baseline, which is not so brazen, even with the weaker dollar whose effects here should be very minor, then this means that all the tariffs have been passed on to US importing firms.

Passthrough to consumers is a tougher judgment. Especially in the short run, it is possible that US firms might absorb this into margins. And it is even conceivable, if counterintuitive, that US firms might try to claw back some of the resulting margin compression by raising prices (and margins) overseas. But prior to today’s hint that the June PCE price data might be a bit firmer than I had modelled, I had core goods prices up about 1 ¼% (not annualized) against their own baseline from March through June. Full passthrough of this now larger tariff bill would imply a figure closer to 3%. So, my best rough guess of passthrough moves from 50% to 40%. But it is possible that some of the upside in prices to June will show up in goods. So, this estimate is subject to revision.

But that aside, the idea that nothing is happening here seems clearly wrong.

A graph of a price

AI-generated content may be incorrect. — *Source: BLS, my friend Dom White for March, April, May and then Julia Coronado as linked above for June.*
*Data are actual to June.*

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