When President Trump announced sweeping tariffs in April, economists predicted surging inflation and raised the odds of a recession. Companies and consumers stockpiled to get ahead of price rises. Those worries now seem overblown.
Inflation, while too high, is lower than forecasts. And the economy continues to grow despite the steepest tariffs in almost a century.
“I’m not sure they’ve mattered as much as people thought they would,” said Kelly Kowalski, head of investment strategies at MassMutual.
At the same time, the promised benefits of tariffs also largely haven’t come to pass: Revenues from Trump’s levies have been far lower than the Treasury Department predicted, and there are few signs of a domestic manufacturing boom.
Annual inflation was 3% in September, above the Federal Reserve’s 2% target. Tariffs have played a role, but a muted one, pushing up prices for goods such as furniture and apparel.
One reason: The real tariffs companies pay are lower than the headline numbers suggest. This is underscored by weaker-than-expected customs and excise taxes collected by the U.S. Treasury.
The U.S. Treasury is on track to collect $34 billion in October, according to a Pantheon Macroeconomics analysis of customs data. If that pace continues, the U.S. would be on track for $400 billion over a full year, short of Treasury Secretary Scott Bessent’s August prediction that tariffs could bring in between $500 billion and $1 trillion a year.
These tariff revenues suggest that the effective average rate companies pay is about 12.5%, Pantheon says—far below the headline numbers, which average over 17% according to some estimates.
Loopholes and exemptions mean many goods avoid higher levies. At the same time, companies have moved production from countries facing high tariffs—especially China—to countries such as Vietnam, Mexico and Turkey that face lower levies for many goods. That pushes down effective rates.
“They’re saying: I’m not avoiding offshore, but I’m diversifying,” said Randy Altschuler, chief executive of Xometry, an online marketplace that connects manufacturers with suppliers around the globe.
Companies have also avoided costs by rushing to build up inventories ahead of tariffs. Signet Jewelers, which imports roughly half its finished jewelry from India, plans to use bonded warehouses, where products can be stored duty-free for a while, and move production to other countries to minimize tariff costs, Chief Operating and Financial Officer Joan Hilson said during a September earnings call.
Logistics company GXO, which operates warehouses across the U.S., is noticing more demand for free-trade zones, said CEO Patrick Kelleher. Companies are also thinking harder about how many goods to import, to avoid paying tariffs on inventory that only ends up sitting in warehouses, he added.
Even where U.S. companies have to pay full tariffs, they are passing only some of these costs on to consumers. Bank of America estimates that consumers are paying 50%-70% of tariff costs so far, with companies covering the rest. A key reason: Corporate profit margins are much higher today than before the pandemic, making it easier for companies to pay tariffs without raising prices.
Retailers are in a position to afford to pay 30% of the tariff costs and still keep their profit margins at roughly the level they averaged during the 2010s, Pantheon estimates.
Take the car industry. Average auto prices in September were only about 1.1% higher than in March, after adjusting for seasonality, according to JPMorgan, even though car imports from many countries faced tariffs of 15% or more.
That number implies carmakers are paying about 80% of the tariff costs and only passing 20% on to customers, JPMorgan estimates. Car prices are up significantly since 2020, and manufacturers worry that consumers simply can’t afford to pay more. The same postpandemic inflation that boosted prices also padded profit margins, making it easier for carmakers to absorb tariffs today.
Clothing brand Aritzia faces double-digit reciprocal tariffs on its imports from Vietnam and Cambodia, and the closure of the de-minimis loophole for small online orders means many of its products can no longer avoid these duties. Still, the company is profitable enough to absorb a hit.
Without the tariffs, the company’s adjusted profit margin before interest, taxes, depreciation and amortization would be between 18% and 19% this fiscal year, executives at the company said during a recent earnings call. Instead, the company is now forecasting a still-comfortable margin of 15.5% to 16.5%. The company’s pricing strategy “is not based on tariffs,” CEO Jennifer Wong said during the call.
Pretariff import prices haven’t fallen significantly, Labor Department data shows, suggesting that foreign suppliers generally aren’t lowering their prices to make up for duties.
Aside from inflation, economists worried tariffs would drag down consumer spending, which accounts for almost 70% of gross domestic product. In April, consumer confidence fell to the lowest level since 2022. In the past, drops in confidence have often led to a decline in spending. This year, Americans boosted by a record-high stock market and low unemployment have kept shopping.
Still, economists say it is too early for a victory lap. They believe tariff-related costs and uncertainty have made some companies more reluctant to hire, possibly contributing to a weakening job market. And economists expect companies to eventually pass a bigger share of tariff costs on to consumers. Many companies are raising prices gradually, meaning the tariff impact on inflation could last well into next year.