Why Investors Should Expect Tariff Impacts This Summer

Key Concepts:

• Tariffs: Taxes imposed on imported goods.
• CPI (Consumer Price Index): A measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
• Supply Chain: The network of all individuals, organizations, resources, activities and technology involved in the creation and sale of a product.
• Inflation: A general increase in prices and fall in the purchasing value of money.
• Price Reset: Adjusting prices, often involving relabeling, to reflect changes in costs or market conditions.
• Exhausted Consumer: A consumer who is sensitive to price increases and may reduce spending.

Tariff Impact and Timing

Many investors are surprised that the effects of higher tariffs have not yet been observed. The speaker believes the impact will start to become visible in the summer (specifically July, August, and September).

Retailer Insights on Pricing

Conversations with large national retailers revealed that price increases in May were basically flat, mirroring the CPI data. Retailers explained that the goods sold in May were purchased in February, before significant tariffs were in place. They are also hesitant to pass on price increases to consumers who are already feeling the strain of rising costs.

Inventory and Cost Lag

The costs associated with tariffs imposed in April (on goods from China) and May (30% on China, 10% on other countries) will take time to filter through the supply chain. These costs are expected to impact prices in August. One retailer mentioned a price reset planned for August, involving a rolling adjustment of price labels.

Time Lag Explanation

It takes approximately 3-4 months for costs to work their way through inventories and affect prices. Manufacturers and retailers are actively trying to avoid passing on these costs to consumers.

The "Cage Match" Analogy

The speaker describes the current situation as a "cage match" between emboldened retailers and exhausted consumers. The key question is whether price increases will stick, and if so, whether consumers will reduce spending in other areas to compensate, given the lack of new income.

Who Pays for Tariffs?

The ultimate burden of tariffs is complex and depends on several factors:

• The specific product.
• The sourcing of goods by competitors (same country or different countries).
• The actual tariff rates (which are still uncertain).

The cost of tariffs will be absorbed in various ways:

• Exchange rate movements.
• Manufacturers absorbing some of the cost.
• Wholesalers and retailers absorbing some of the cost.
• Consumers paying higher prices.

Supply Chain Negotiations

The current situation involves extended supply chain negotiations as retailers attempt to negotiate with suppliers to mitigate the impact of tariffs. This negotiation process is contributing to the delay in seeing tariff effects in consumer prices.

Conclusion

The effects of tariffs are expected to become noticeable in consumer prices during the summer months (July, August, and September). However, the extent to which these price increases will stick depends on the willingness and ability of consumers to absorb them. The burden of tariffs will be distributed across various players in the supply chain, and ongoing negotiations are further delaying the impact on prices.