While a 10% increase in costs for goods representing less than 2% of the GDP might not seem significant enough to disrupt the economy, the timing of President Donald Trump’s tariff decisions is causing concern among American consumers. The first tariff imposed by Trump is a 10% tax on all imports from China, which American importers will have to pay to the US Treasury. With China exporting about $450 billion worth of goods to the US annually, this could potentially result in an additional $45 billion in costs for American buyers. In the grand scheme of the $29 trillion economy, this may seem negligible.
However, American consumers are currently more cautious than ever when it comes to price hikes. Research indicates that the reluctance to pay higher prices is at a record high, following a period of inflation not seen since 2022. Despite Trump’s promise to lower prices during his 2024 presidential campaign, recent consumer behavior suggests a growing aversion to spending in the face of rising costs.
Surveys by reputable institutions show that Americans are bracing for further inflation in the coming months, largely due to the impact of Trump’s tariff policies. Concerns about potential inflation have led the Federal Reserve to halt interest rate cuts, awaiting the outcome of Trump’s economic strategies. While some experts believe that Trump’s tariff threats may be tactical bluffs, the full extent of the consequences remains uncertain to the market.
Trump’s unpredictability is evident in his ultimatum to Mexico and Canada, giving them until early March to meet undisclosed demands or face a 25% tariff on imports. The potential tariffs on these countries could have a more substantial impact compared to those on China. Considering the scale of imports from Canada and Mexico, a 25% tariff could result in significantly higher costs for American consumers.
Furthermore, Trump has proposed a universal tariff of around 10% on all imports, as well as targeted tariffs on specific products from the European Union, including pharmaceuticals and computer chips. Analysis suggests that the collective impact of Trump’s planned tariffs on Canada, Mexico, and China could cost the average family approximately $1,200 per year in increased expenses and lost productivity. If all threatened tariffs are imposed, the financial burden on families could surge to around $2,600 annually.
While past tariffs under the Trump administration did not lead to significant inflation, they did contribute to increased costs within the US, particularly affecting industries like automakers. The full ramifications of Trump’s tariff policies are yet to unfold, with uncertainties surrounding their consequences for the economy and consumers.
For his second term, Trump has proposed imposing larger tariffs than those he applied during his first term, responding to a more inflationary environment. Upon assuming office in 2017, the average inflation rate over the previous four years was 1.2%. However, in the period spanning 2021 to 2024, this average surged to 5%. Although inflation has significantly decreased from its peak of 9% in 2022 to the current rate of 2.9%, concerns around reflation persist due to a recent uptick in inflation over the last three months.
Rick Newman can be contacted via a note, followed on Bluesky, or subscribed to for his newsletter. Notably, the key distinction between Trump’s initial and subsequent terms lies in consumer psychology. In the period from 2009 to 2021, inflation was virtually non-existent. The emergence of the shale drilling revolution led to abundant and inexpensive energy sources, while peak globalization facilitated the influx of affordable goods into the United States from across the globe. The gradual recovery from the Great Recession contributed to modest spending growth during this time.
Presently, the global economy is grappling with heightened inflation levels. Oil drillers, having faced challenges amidst the 2020 oil price collapse, are now focused on maintaining profitability by limiting production capacity. Additionally, trade barriers are on the rise worldwide, exerting upward pressure on prices.
In the U.S., inflation outpaced income growth for much of 2021 and 2022, with many households only recently beginning to feel a sense of catching up. The Morning Consult’s price sensitivity data sheds light on a phenomenon that perplexed the Biden administration: despite a significant drop in inflation from 2022 to 2024, voters did not attribute this to President Biden. Consumers often note that while inflation rates may be decreasing, prices could remain permanently elevated, straining their budgets.
According to Morning Consult data, there is a substantial disparity between the percentage of consumers willing to forego a purchase upon encountering higher prices and those who choose to proceed with the purchase regardless. This gap is the widest observed in surveys dating back to April 2022.
Although peak inflation hit 9% in June 2022, consumer behavior has since evolved. Shoppers experiencing consistent price hikes each month may eventually reach a point of “inflation fatigue,” where they opt to abstain from purchases altogether.
Consumers, now more than ever, are closely monitoring prices and hoping for affordability. Despite attempts to shift blame, Trump recognizes that consumers ultimately desire lower prices and more accessible products. Rick Newman, a senior columnist at Yahoo Finance, provides insights on critical business and financial news, offering a glimpse into how political decisions may shape future stock prices.
