Forum

Pulling a rabbit from a hat is easy magic when compared to keeping inflation and tariff turmoil under control. When the Trump administration announced sweeping tariffs on imports from China, Canada, and other trading partners, many economic potentates ran up the red flag warning that American consumers were about to feel the pain in the form of surging prices. Yet, months later, inflation has remained stubbornly subdued, is it money magic or something else?

In May, the personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred gauge, climbed just 2.3% from a year earlier. The broader Consumer Price Index rose 2.4%, slightly below forecasts.

The big question everyone is asking is why haven’t tariffs triggered the wave of inflation that so many economic gurus predicted? A combination of money magic, strategic inventory maneuvers, cautious pricing strategies, and loopholes in trade policy have helped businesses cushion the blow. But some experts caution this respite may be temporary, with price increases that may materialize as the year progresses.

One of the main reasons prices haven’t spiked is simple: companies knowing a possible traffic rough road may be ahead raced to front-load imports before the tariffs took effect. Retailers, manufacturers, and wholesalers stocked warehouses with everything from electronics to industrial components. Cargo ships were quickly filled and unloaded directly into warehouses to build the stockpile. It wasn’t magic but common sense to stockpile for the possible cost hike.

“They tried to get ahead of the duties by importing as much as they could,” said Gregory Daco, chief economist at EY-Parthenon. “That inventory is still sitting on shelves, and until it’s sold through, companies don’t necessarily have to raise prices."

This front-loading strategy effectively delayed the impact of tariffs, buying time for businesses to adapt or negotiate. However, once pre-tariff inventory is depleted, companies will have to pay higher duties on new shipments, putting upward pressure on consumer prices unless more favorable terms are negotiated on tariffs, and that could mean more profit and lower prices for companies.

Another money magic factor suppressing inflation is the sheer unpredictability of U.S. trade policy. Over the past several months, the administration has alternated between imposing tariffs and suspending them as negotiation tactics.

In April, many tariffs were frozen for 90 days, a pause that left businesses unsure whether to pass costs to consumers or hold out for a potential trade deal.

“When you have that much volatility in policy, companies are reluctant to adjust prices aggressively,” said Charley Ballard, professor emeritus of economics at Michigan State University. “No one wants to raise prices today only to have tariffs lifted tomorrow.”

Retailers have been concerned that hiking prices too quickly risks alienating customers already fatigued by higher costs during the pandemic. Some companies are choosing to absorb part of the tariff burden themselves or spread increases gradually to protect their market share.

Even where tariffs are in force, importers have found ways to mitigate their impact. Bonded warehouses and foreign trade zones, special areas near ports where goods can be stored duty-free until they enter U.S. commerce, have allowed companies to defer payments or re-export goods without incurring tariffs at all.

The rabbit in the hat is not dead; it is still part of the magic trick now being seen in free-trade zones. “These free-trade zones are effectively a pressure valve,” Daco explained. “They help smooth out the immediate cost shock."

What developed was a patchwork of exclusions and exemptions that has further softened the blow. While official tariff rates may run as high as 145% on some products, the effective tariff burden has averaged closer to 10% because of these carve-outs.

“Patience is the main reason we haven’t seen stronger inflation,” said James Rossiter, head of global macro strategy at TD Securities. “But by late summer, we expect the pass-through to start showing up more clearly.”

Final Word: When the Big Beautiful Bill is passed and the inflation cyclone has calmed, the money magic of profit will flow once again.

Disclaimer: This article is for informational and educational purposes only and should not be construed as financial, investment, or legal advice. The content reflects the author's opinions based on personal research and experience and may not be suitable for your individual circumstances. Always conduct your own due diligence and consult with a qualified financial advisor, accountant, or legal professional before making any financial decisions. The author and publisher assume no responsibility or liability for any errors or omissions in the content or for any actions taken based on the information provided.