Impact of Trump's Tariffs on US Economy and Consumer Behavior

Elevated Consumer Price Sensitivity

A 10% increase in the cost of purchases accounting for less than 2% of GDP may not significantly impact the overall US economy. However, the timing of President Donald Trump's tariff implementation coincides with heightened consumer sensitivity to price increases. This unprecedented wariness stems from a spike in inflation to a 40-year high in 2022, leading to a growing reluctance to pay higher prices.

Impact on Inflation

Consumer surveys by the University of Michigan and the Conference Board indicate that Americans expect inflation to worsen due to Trump's tariff policies. Wall Street analysts warn that market pricing may not fully reflect the potential damage caused by the tariffs.

Targeted Imports by Country

Trump has imposed tariffs on imports from China, Canada, and Mexico. Notably, a 25% tariff on imports from Canada and Mexico would result in higher costs than the 10% tariff on China. Trump's plans also include a universal tariff of 10% on all imports, tariffs on European Union products, and targeted tariffs on specific goods like pharmaceuticals and computer chips.

Estimated Impact on Consumers

According to the Peterson Institute for International Economics, Trump's proposed tariffs on Canada, Mexico, and China would cost an average family approximately $1,200 annually in additional costs and productivity losses. If all threatened tariffs are implemented, the impact could reach $2,600 per family.

Historical Perspective and Current Market Conditions

While Trump previously imposed tariffs in 2018 and 2019 without triggering significant inflation, these tariffs did increase costs in the United States. However, the COVID-19 pandemic disrupted Trump's trade war in 2020, leading to a recession that temporarily depressed prices. The current inflationary environment is more pronounced than when Trump first took office in 2017.

Consumer Perspective on Inflation

Despite falling from a peak of 9% in 2022 to 2.9% currently, inflation has been ticking upward for the past three months. Consumers remain concerned as rising prices persistently outpace income growth. Voters did not credit President Biden for the decline in inflation, highlighting the perception of permanently elevated prices.

Increased Price Sensitivity

According to Morning Consult, the portion of consumers willing to forgo purchases due to higher prices is now significantly higher than those willing to pay. This trend reflects inflation fatigue, with consumers growing weary of persistent price increases and opting to cut back on spending.

Conclusion

Trump's tariffs are exacerbating inflation and consumer price sensitivity. The resulting decline in consumer spending could potentially dampen economic growth. Consumers are closely monitoring prices and are less likely to tolerate price increases. Trump's actions are unlikely to make consumers more accepting of higher prices, potentially undermining his economic agenda.