Tariffs: A Pain Point for US Consumers Amidst Economic Sensitivity
A 10% tariff increase on imports that represent less than 2% of GDP may seem insignificant, but it has the potential to significantly impact the US economy, especially considering the heightened consumer sensitivity to price hikes.
President Trump's tariff policy, which imposes a 10% tax on all imports from China, could result in an additional $45 billion in costs for American purchasers. This, coupled with rising inflation and consumer wariness, has raised concerns about reflation.
Consumer surveys and research by Morning Consult indicate that Americans are increasingly reluctant to pay higher prices, with the reluctance reaching its highest level since 2022. Despite inflation easing from its peak, the cumulative effect of price increases has made consumers more likely to postpone purchases rather than accept higher costs.
Some analysts believe Trump's tariff threats may be bluffs, but if implemented, they could have a substantial impact on the market. Trump has also threatened to impose 25% tariffs on imports from Canada and Mexico, which would have a more significant effect than the 10% China tariff.
Proposed universal tariffs on all imports, as well as product-specific tariffs on pharmaceuticals and computer chips, could further increase costs for consumers. The Peterson Institute for International Economics estimates that Trump's planned tariffs could cost the average family $1,200 per year, and if all threatened tariffs were implemented, the hit could reach $2,600 per family.
While Trump previously imposed tariffs in 2018 and 2019 without triggering significant inflation, the current economic environment is different and more susceptible to price increases. Inflation has risen sharply in recent years, averaging 5% from 2021 to 2024.
Consumer psychology is a key factor in understanding the impact of Trump's tariffs. After a period of low inflation from 2009 to 2021, consumers are now more sensitive to price increases. Higher inflation, rising income inequality, and global trade barriers contribute to this heightened sensitivity.
Morning Consult data shows that the percentage of consumers willing to forego a purchase due to higher prices is significantly higher than those willing to pay. This trend has continued despite a decline in the inflation rate, indicating inflation fatigue.
Trump's policies are unlikely to make consumers more accepting of higher prices. While he may blame Biden for inflation fatigue, consumers ultimately desire lower prices and more affordable products.