Most economists expect US President Trump’s tariffs to push up prices in the US. However, despite significant tariff hikes months ago, inflation remained surprisingly stable, until now. I see three main reasons—at least two of them suggesting that US inflation is likely to rise even further.
Trump’s tariff policies often feel surreal. New tariffs are announced, only to be withdrawn a few days later. Brazil faces tariffs because Trump favours the former president and dislikes the democratically elected incumbent. The EU receives letters threatening fresh tariffs while negotiations are still ongoing. And so it goes on. Martin Wolf’s piece in the FT on the chaos and cost of this policy (link) says it best: “It cannot be said too often that this is nonsensical economics.” I agree.
Yet, circus or not, Trump’s tariffs are very real in their impact. Before he took office, the average effective US tariff rate was less than two per cent. Today, according to the Yale Budget Lab (link), it stands at 18%—almost ten times higher.
As a result, tariffs have grown into a significant cost for businesses. The US Monthly Treasury Statements (link) show how much the Treasury collects in customs duties — revenue generated by tariffs. This is illustrated in Figure 1.
Figure 1. US custom duties, USD billions, monthly data, January 2024– June 2025. Source: US Monthly Treasury Statements (link) and J.Rangvid.
Customs duties were stable at around USD 6–7 billion per month until April. However, since Trump imposed wide-ranging global tariffs on ‘US Ruination Day’, 2 April 2025 (link), they have surged. In June, US businesses paid over $26 billion in custom duties—the highest monthly figure in decades.
Tariffs are taxes that increase companies’ costs. Firms have two options in response:
- Do nothing and accept lower profits.
- Raise prices to offset the higher costs.
Economists—including yours truly—expect firms to pass on at least some of these costs by increasing the prices charged to final consumers.
However, as Figure 2 illustrates, US inflation had remained largely stable until the most recent figures for June, when CPI inflation increased from 2.4% to 2.7%. (PCE inflation data for June were not yet available at the time of writing.)
Figure 2. US inflation, both CPI and PCE inflation included, monthly data, January 2024 – June 2025. Source: FRED of St. Louis Fed and J.Rangvid.
There are at least three reasons why inflation had remained stable—some of which suggest the rise in June was the first sign of what is in store, and not just a temporary blip.
Reason 1: Firms stockpiled goods in anticipation of the new tariffs
Data on US goods imports go back to 1999. Figure 3 shows the quarterly percentage change in the real value of goods imported into the US. On average, US imports have increased (in real terms) by about one per cent per quarter. In the first quarter of 2025—after Trump’s election but before tariffs surged on 2 April—imports rose by an extraordinary 18 per cent. This was the largest quarterly increase on record.
The next-largest increase came in the third quarter of 2020, immediately after the pandemic lockdowns ended and the economy reopened, naturally driving up imports. In contrast, the only plausible explanation for the Q1 2025 surge is that firms rushed to import as much as possible ahead of Trump’s forthcoming tariffs.
Figure 3. Quarterly change in US real imports of goods. Imports of goods deflated by the GDP price deflator, 1999-2025. Source: FRED of St. Louis Fed and J.Rangvid.
Furthermore, as I explained (link), firms added these imports to their inventories in Q1 2025. This has allowed firms to sell these goods without needing to raise prices. It is only once inventories run down, and firms must resume importing at the new, much higher tariff rates that they will face higher costs due to the tariffs. The fact that customs duties have risen month by month since April (see Figure 1) suggests that firms have steadily increased their imports.
So, the first reason inflation did not rise for months, despite the sharp increase in tariff rates, is that firms did not need to import as much once the new tariffs took effect, having already stockpiled goods beforehand.
Reason 2: Corporations have absorbed the extra costs
Even though imports surged in Q1—reducing the need for many firms to import since then—some companies have of course imported goods at the higher tariff rates, as evidenced by the rise in tariff revenues shown in Figure 1. It is likely that these firms have absorbed the extra costs due to higher tariffs internally, accepting lower profits instead of raising prices.
While definitive data on the profit impact of tariffs is not yet available, surveys suggest this indeed happened. For example, a recent KPMG survey (link) of 300 large US corporations found that more than half (58%) reported that tariffs have reduced their gross margins; around a third of firms said tariffs had cut margins by 1–5%, while a quarter reported a reduction of 6–10%. This indicates that many firms have not fully passed on the costs to consumers but have instead taken a hit to their bottom line. Forbes (link) recently published a useful overview of major US companies acknowledging how higher tariffs are squeezing their profits.
One reason firms accepted to take a hit to their profits is that corporate profits are at or near record highs, as Figure 4 shows.
Figure 4. US corporate profits as a fraction of US GDP, 1980-2025. Source: FRED of St. Louis Fed and J.Rangvid.
When profits are strong, firms may judge it better to absorb higher costs than to risk alienating price-sensitive consumers—or provoking a backlash from a volatile president. Recall how the president reportedly called Amazon founder Jeff Bezos after the company planned to inform customers about tariff-related price increases (link). In such a political climate, firms may think twice before provoking the president’s wrath, preferring instead to protect political goodwill by accepting lower profits—at least until now.
The June uptick in inflation suggests this is changing. Firms are likely paying so much in import duties now, cf. Figure 1, that they can no longer just absorb the costs and are starting to pass them on to customers.
Reason 3: General inflationary pressures easing
The third reason inflation had not increased until June is that broader inflationary pressures have continued to ease since the surge in 2022. For example, Figure 5 illustrates sticky-price core inflation over the past decade. As noted on the Federal Reserve’s website, this index “is calculated from a subset of goods and services included in the CPI that change price relatively infrequently. Because these goods and services change price relatively infrequently, they are thought to incorporate expectations about future inflation to a greater degree than prices that change on a more frequent basis.”
As shown in Figure 5, this measure of underlying inflationary pressures has continued its downward trend. While it remains somewhat too high (relative to the Fed’s inflation target of two percent) at around three percent, it is steadily declining.
One factor contributing to this general easing is the decline in shelter inflation, which Figure 5 also illustrates. It is, of course, difficult to argue that lower housing costs are related to tariffs — again pointing to a broader moderation of inflationary pressures across the economy.
Figure 5. Sticky-price core inflation and shelter inflation, Jan. 2015- June 2025, monthly data. Source: FRED of St. Louis Fed and J.Rangvid.
Off track: Has Trump fixed the fiscal hole?
Slightly off topic, but to avoid any misunderstanding: the increase in customs revenues shown in Figure 1 will not be nearly enough to close the gap in the US fiscal budget.
In June, total US government revenues were USD 526 billion, of which customs duties accounted for USD 26 billion—roughly 5%. So far this fiscal year (from October 2024 to June 2025), total government spending has reached USD 5.3 trillion, while revenues have amounted to only USD 4 trillion. This leaves a substantial shortfall that cannot be plugged by higher import duties alone.
Of course, additional revenues help, but higher customs duties are nowhere near sufficient to fix the budget.
Conclusion
Tariffs are, in effect, taxes paid by firms when they import goods, which raises production costs. Normally, when production costs rise, firms pass those higher costs on to consumers through higher prices. In short, we would expect higher tariffs to lead to higher prices. Yet, despite the steep increase in tariff rates in April, US inflation has remained stable for several months, up until June. I see three main explanations for this.
First, US firms significantly increased imports early in the year in anticipation of the new tariffs. As a result, they were still drawing on inventories bought before tariffs rose, which delayed the need to raise prices.
Second, firms that have imported goods since the tariffs rose appear to have absorbed some of the additional cost, accepting lower profits instead of passing the burden directly to customers.
Finally, other inflationary pressures in the economy have eased, counteracting the effect from higher prices due to higher tariffs.
Looking ahead the first two factors are likely to fade. The stockpiled inventories purchased before tariffs were hiked will eventually be depleted. When firms must start importing again at the new, much higher tariff rates, their costs will rise—costs they are then likely to pass on to consumers. Likewise, while many firms that have imported goods during the new high-tariff regime have so far absorbed these costs, it is unlikely they will do so indefinitely. Taken together, these factors suggest that tariffs will continue to push prices higher. The first signs of this appeared in June—and this trend is likely to persist for some time.
