Tariffs Begin Taking a Bite out of the Economy
Tariffs are taxes, and we pay the price.
Even as some Republicans mocked economists for predicting prices would rise as a result of tariffs, there was a whistling-past-the-graveyard quality to the snickering. Yes, tariffs that had been threatened, delayed, and only partially implemented hadn't yet much increased costs for consumers, but there were clear signs that importers were rushing to beat high customs duties, and that trouble was on the way. Now we've had a weak jobs report and a higher-than-expected producer price index (PPI), and it's clear that tariffs perform just as we were warned: They raise prices for domestic businesses and consumers.
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Price Increases Working Through the System
"Tariffs raise prices," Ryan Young, senior economist for the Competitive Enterprise Institute, commented last week after the release of the PPI. "Many of those price increases are still working their way through supply chains. That is why the Producer Price Index (PPI) is running hotter than the Consumer Price Index. It is a harbinger of things to come. It now looks much more likely that inflation will increase in the coming months, making the Federal Reserve's job even more complicated."
The PPI measures prices received by domestic producers at the wholesale level. Those prices work their way through the economy over a few months until they show up on store shelves as consumer prices. Broad-based tariff increases often first affect manufacturers who need to buy the parts and materials from which they make finished goods, and their prices rise accordingly. After months of the Trump administration raising tariffs in fits and starts, sweeping increases went into effect earlier this month. A higher-than-expected PPI increase of 0.9 percent—it was anticipated to rise by roughly 0.2 percent—which annualizes to 3.3 percent, indicates that the trade war is starting to pinch the economy.
How badly the tariffs increase budgetary pain for the average American depends on the analysis. Economists not only look at tariff rates but also try to predict the way consumers and businesses will respond by changing their purchasing habits.
According to the Yale Budget Lab, "Consumers face an overall average effective tariff rate of 18.6%, the highest since 1933. After consumption shifts, the average tariff rate will be 17.7%, the highest since 1934." Budget Lab economists predict that "the price level from all 2025 tariffs rises by 1.8% in the short-run, the equivalent of an average per household income loss of $2,400 in 2025$."
The Tax Foundation's Erica York and Alex Durante believe "under all the imposed tariffs, the weighted average applied tariff rate on all imports would rise to 19.5 percent, and the average effective tariff rate, reflecting how much tariff revenue the new tariffs would raise after incorporating behavioral responses, would rise to 11.7 percent under the current tariffs—the highest average rate since 1941." They predict "the imposed tariffs would reduce market income by 1.5 percent in 2026…and amount to an average tax increase per US household of $1,304 in 2025 and $1,588 in 2026."
It's impossible to argue that taxes haven't increased, since the president himself boasts of this fact. On Truth Social, the president posted that "trillions of Dollars are being taken in on Tariffs, which has been incredible for our Country, its Stock Market, its General Wealth, and just about everything else."
"Trillions" overstates the case. The Penn Wharton Budget Model reports that "new tariffs have raised $58.5 billion in revenue between January 2025 and June 2025 before accounting for income and payroll tax offsets"; the Tax Foundation sees $2.3 trillion being collected over the next decade. Trump argues that American businesses and consumers don't pay these tariffs. But that's not what economists believe. Some customs duties may be partially absorbed by foreign firms, but only if there's enough wiggle room to allow it.
Businesses Are Passing Tariff Costs to Consumers
Companies reliant to one extent or another on imports, including Walmart, car companies, and drug companies, have made it clear that they'll try to switch suppliers and shield consumers from the worst effects, but people will ultimately pay more because of protectionism. The Federal Reserve Bank's July 2025 Beige Book found that across the country, "businesses reported experiencing modest to pronounced input cost pressures related to tariffs, especially for raw materials used in manufacturing and construction." The authors added that "many firms passed on at least a portion of cost increases to consumers through price hikes or surcharges, although some held off raising prices because of customers' growing price sensitivity, resulting in compressed profit margins."
Rising PPI suggests that businesses are still shouldering more costs. Soon, we can expect more of those costs to be passed to consumers.
But the PPI wasn't the first indication that the economy was being pinched. A weak jobs report showed slowing hiring—unsurprising with employers facing rising costs and anticipating worse. That prompted President Trump to fire the director of the Bureau of Labor Statistics (BLS). True, the BLS has a history of problems, including a habit of revising numbers after the fact. But the president seemed to take the report as a "faked" and politicized personal slight rather than as the typical product of what is often a craptastic federal bureaucracy. Few people were persuaded.
Fears of Worse To Come
"Republicans on Capitol Hill are feeling jittery about the economy after the latest jobs report showed the economy added far fewer jobs than previously estimated over the past three months," The Hill's Alexander Bolton reported. Bolton added that "some in the GOP…worry Trump's trade regime is creating economic headwinds."
Private businesses already feared headwinds. In mid-July, Port of Los Angeles Director Gene Seroka warned that the then-healthy flow of imports (and the customs revenues they generated) reflected stockpiling by firms hoping to beat tariffs. With new duties in effect the latest Global Tracker report, released earlier this month, anticipates cargo volume for 2025 will be 5.6 percent lower than last year.
"Tariffs are beginning to drive up consumer prices, and fewer imports will eventually mean fewer goods on store shelves," National Retail Federation Vice President for Supply Chain and Customs Policy Jonathan Gold commented. "Small businesses especially are grappling with the ability to stay in business. We need binding trade agreements that open markets by lowering tariffs, not raising them."
CEI's Ryan Young warns that "bad economic news will keep coming for as long as the president keeps increasing tariffs. The easiest solution is ending those tariffs, rather than shooting the messengers at BLS or threatening the Fed's independence."
For now, that bad economic news is starting to appear in our businesses' bottom lines and in our family budgets.
