Trump's tariffs haven't raised prices yet. That might be a bad sign

Globe and Mail

a day ago

John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
This week's inflation reports in both the United States and Canada were surprisingly benign, given we're in a trade war. In both countries, inflation ticked upwards, but just a bit: enough to keep central banks from cutting interest rates but not to ring the sort of alarm bells that the 'Liberation Day' tariff announcement set off.
On the face of it, therefore, Donald Trump has been vindicated. White House press secretary Karoline Leavitt crowed, 'The data proves that President Trump is stabilizing inflation and the Panicans continue to be wrong about tariffs raising prices.' To underscore this point, much was made of a release showing Japanese car prices falling, apparent evidence that Mr. Trump's prediction that foreigners would pay the tariffs was being borne out.
But in fact, the data may be more troubling than the White House is letting on. The Japanese figures appear to have been a one-off, reflecting the large cushion Japanese automakers had accumulated: years of a weak yen having made their cars cheap in America, swelling their profits and thus allowing them to slash prices to hold market share.
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But the broader data we're getting on import prices doesn't reveal any softening. On the contrary, a mild inflation continues. So on the whole, foreign exporters aren't eating the tariffs by lowering their prices. That means someone stateside is paying them, and they're paying a lot – US$64-billion in the second quarter alone, nearly US$50-billion more than the same time last year.
There are two candidates: businesses and consumers. The big surge in tariff revenues came in May, which confirms what was already suspected – that importers had got ahead of tariffs by stockpiling goods early in the year. Those stocks apparently began to run out only in May, which would account for the take-off of revenue collections then. Given the time between a good's arrival in port and its appearance on store shelves, we would not expect major price increases until perhaps the late summer, which explains some of the softness in prices.
In addition, we're getting anecdotal evidence that American companies are, for now, absorbing the hit from tariffs. Given the on-again-off-again character of Mr. Trump's trade war, it's still not clear if tariffs will be in place later this year. He may chicken out and suspend them again, as investors expect, or he may win the great trade deals he's trying to squeeze out of other countries, dropping his tariffs in response. Until more clarity emerges about the long-term status of tariffs, companies are choosing not to alienate their customers with price rises, and are hoping for better days.
That can't go on forever, though. Absorbing the tariffs is pressuring their bottom lines, which means they have less money left over for investments, pay rises or Christmas bonuses. This has been showing up in both the soft and hard data, with companies cutting back their hiring plans, job and wage growth slowing and future investment plans softening.
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The picture that emerges, therefore, is of an economy that is slowing as businesses absorb the tariffs. The slowing economy has reduced demand, which in turn has caused service-sector prices to rise more slowly. That disinflation has then counterbalanced the price rises we are seeing elsewhere in the economy, where the impact of tariffs is starting to materialize. For instance, food prices are trending back up in the U.S., which is to be expected since unlike durable goods, food can't be stockpiled, so the effect of tariffs shows up more quickly.
In other words, good news on inflation is bad news for the economy. That may be an omen of what lies ahead. If the economy continues slowing, falling demand may keep prices from rising too sharply, but it could also point to a coming recession. Hardly a vindication of the White House.
If instead the tax-cuts windfall from Mr. Trump's Big Beautiful Bill stokes sufficient demand to keep the economy out of recession, but the tariffs remain in place, companies will eventually pass along the price rises. That could begin happening in the autumn. The return of inflation, not least to food prices, would also augur ill for the White House, given that Mr. Trump ran for office promising to bring them down.
The worst scenario of all is that we get a bit of both, raising the prospect of the dreaded stagflation returning. Mr. Trump's get-out-of-jail card will be if America's trading partners cave and agree to trade deals which both boost U.S. export sales and allow tariffs to fall. So the next few weeks will be crucial, since the President has set Aug. 1 as a deadline for many of the tariffs to take effect.
He has until then to end his trade wars, with either victory or surrender. If neither happens, autumn could turn ugly.