Why tariff costs have not hit shoppers' wallets — yet

[Taking Euros from a wallet]
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The initial impact of President Donald Trump's new tariffs has been quite muted [https://mohamedelerian.substack.com/p/tariffs-the-curious-case-of-the-missing], but the reason lies more in how companies have responded rather than in the policy, Mohamed El-Erian, Allianz chief economic advisor, said.

"Recent economic data and corporate earnings reports are helping to illuminate why this has been the case and what might lie ahead. The answer lies in the dynamic reactions of both foreign exporters and domestic importing firms, combined with the role of inventories," El-Erian added.

The economist, who is also the president of Queens' College, Cambridge, said that rather than immediately passing higher costs onto shoppers, exporters, and importers, they have acted as shock absorbers. They have used their profit margins and inventories to shield consumers from the full effect.

"Absorbing the initial cost was preferable to immediately risking alienating consumers. The worry was that significant price hikes, introduced for a potentially temporary and reversible policy, could damage customer loyalty and market share," he said.

Additionally, some domestic companies also accumulated significant inventories of imported goods before the tariffs went into effect. The stockpiling gave them more flexibility, letting them sell their goods at pre-tariff prices for some time and delaying the additional costs to the consumer.

However, this cushion cannot be permanent, as recent indications suggest that the initial era of significant tariff absorption may be evolving, El-Erian noted.

"As uncertainty over tariff levels recedes and existing inventories diminish, companies are beginning to face more challenging, longer-term decisions about pricing and profits," he said.

The eventual impact will likely be uneven. Businesses that sell products wherein consumers are less sensitive to price are likely to see sharper increases. Companies that have more elastic demand, especially those catering to lower-income consumers, will find it more challenging to raise prices without hampering demand, El-Erian said.

"Indeed, rather than a broad and generalized effect, the pass-through of tariffs to prices could well vary significantly not just from sector to sector but also from company to company, and even from product to product, reflecting differences in pricing power, demand elasticity, product differentiation, and competitive pressures," he said.

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