US Economics Weekly: The other side of tariffs: Disinflation in the pipeline

Research evidence excerpt

US Economics Weekly: The other side of tariffs: Disinflation in the pipeline

IdeaMin goods prices should decelerate in the coming months as pass-through is completed.

NIPA data on the nonfinancial corporate sector indicates that firms have raised output

prices by more than non-labor costs increased in 2025. That suggests to us that pricing

adjustments following Liberation Day have been implemented.

Second, inflation payback from an end to tariff pass-through could mean a 70bp reduction

in the year-on-year rate of inflation if these goods components move back to their pre-

Liberation Day trend. Good prices with high exposure to tariffs were flat on a m/m basis in

2023-24, while goods categories with less exposure to tariffs were up 0.1% per month.

They have been up 0.22-0.25% m/m since. There is room for payback.

Our point is that the sum of the direct and indirect effects of oil and AI-related demand on

inflation need to be 70bp in terms of a year-on-year rate of inflation to keep inflation from

decelerating, all else equal. They need to be stronger than this to indicate inflation is

firming. This is under the assumption that core goods return to their pre-tariff trend.

Perhaps they don't and the bar for stable or firming inflation is lower. However, if goods

prices return to prior trends and the conclusion of Section 232 and 301 trade reviews do

not bring meaningfully higher effective tariff rates, then we think it is unlikely that

inflation firms and prompts hikes from the Fed. If so, then markets will likely reduce the

probability it places on rate hikes as month-on-month rates of inflation slow into year-end.

Exhibit 4: Goods prices with tariff exposure have moved Exhibit 5: After adding nearly 70bp to the y/y rate of inflation,