US businesses absorb nearly 90% of tariff costs, New York Fed finds

Supreme Court struck down Trump tariffs; 10% rate replaced them

US businesses absorb nearly 90% of the cost of President Donald Trump’s tariffs, according to research from the Federal Reserve Bank of New York. The finding comes as the Bureau of Labor Statistics reported US consumer prices rose 3.7% in the 12 months ending in September, up from 3.4% in August and above forecasts, in the final inflation release before next month’s midterm elections.

The New York Fed also found that every percentage-point increase in average tariffs led to nearly a 0.25% rise in consumer goods prices after one year. In February, the Supreme Court ruled most of the remaining global tariffs unlawful, and Trump immediately announced a replacement 10% global tariff.

Higher tariffs—which are levies that businesses pay on the goods they import—directly raise prices for US companies unless the overseas firms they are buying from lower prices to absorb some of the cost. The New York Fed found that exporters reduced prices very little in response to the higher tariffs, meaning US-based businesses ended up absorbing nearly 90% of the cost of the added tax. Indirectly, higher tariffs also affected the prices of locally made goods, as many US producers rely on parts, materials or ingredients from overseas.

Since coming into office for the second time, Trump has introduced tariffs on most US trading partners around the world. Some of the initial tariffs announced last year were scaled back by the president as the US made trade agreements with countries. Trump argued the tariffs would “increase America’s tax earnings, boost manufacturing and encourage people to buy US-made goods.”

The September inflation reading, released by the BLS, showed consumer prices rose 3.7% year over year, above the Fed’s 2% target. Higher gasoline prices drove much of the increase. Gasoline prices spiked following disruption to Middle East energy supplies caused by the US-Israel conflict with Iran. Crude oil, which is used to make gasoline and diesel, traded at just over $70 a barrel before the war began; when the conflict constricted crude supplies, the price quickly rose and is currently over $100.

Core inflation, which strips out the volatile food and energy categories, ran at about 2.4% year over year in September, according to FRED data, above the Fed’s 2% target. The Fed and most central banks consider inflation of about 2% or a little higher to be stable, at a level that does not affect people’s purchasing decisions. Much below that, people can delay spending if they expect prices to fall further, which can lead businesses to reduce wages or cut workers to cope with lower demand.

Inflation is the rate at which the price of products or services increase over time. For example, if a bottle of milk costs $1 but rises to $1.10 a year later, then annual inflation for bottled milk is 10%.

The Bureau of Labor Statistics measures inflation through the consumer price index, which tracks the price changes of hundreds of goods and services, from groceries to clothing, energy and medical services. The bureau has measured inflation for more than 110 years and updates the basket of goods over time as spending and lifestyle habits change—cars and radios were not included in early data, while ice was later replaced by refrigeration in the energy section alongside fuel and electricity.

Several factors can push prices up. If demand for a product outstrips its supply, producers can raise prices—the craze for Labubu dolls in recent years and their high resale prices are one example. Higher incomes can also lead to higher demand, which in turn pushes up prices, and reduced supply with constant demand raises prices as well. An inflation rate rising at a slower pace does not mean prices are going down—it simply means prices are rising at a slower pace.

Inflation has been much higher in recent years. During the Covid pandemic, supply-chain disruption began pushing prices up, and oil prices surged above $100 a barrel in early 2022 when Russia launched its full-scale invasion of Ukraine. Those factors helped drive inflation to a peak of about 9%. The current reading remains far below that peak but well above the Fed’s target.

The September figures land weeks before voters go to the polls. The elections are being fought over cost-of-living pressures across the US.