Companies don’t wait for tariffs to come into effect
It feels like an eternity ago, but in March and April, Donald Trump made such a barrage of tariff announcements that the outlook for global trade changed daily. While the speed of new announcements has declined since then, the uncertainty about future tariffs has not. Most tariffs are still paused at the time of writing, but businesses deal with the uncertainty about future costs very straightforwardly: Hike prices today, ask questions later.
Alberto Cavallo from Harvard Business School and his collaborators are constantly updating how two major US online retailers (I think we can all guess which ones) adjust their prices as tariffs are announced. You can check out the link above to see the latest version of his research.
Two things were immediately clear, even in the early days after the tariff announcements. Retailers increased prices for imported goods and domestically produced goods affected by the tariffs, even before the tariffs came into effect. Any delay or reversal of tariffs led only to a smaller reduction in prices.
Price changes of imported and domestically produced goods in the US
Source: Cavallo et al. (2025). Note: Dashed vertical lines indicate major tariff events in March and April 2025.
Let's look at the prices of imported goods by their country of origin. We can see that the retailers reacted directly to the tariffs by hiking the prices of goods from China when tariffs against Chinese goods were announced and by hiking prices on goods from Canada and Mexico when tariffs hit these two countries. Here, we see that price increases on goods from Canada and Mexico reversed as tariffs were paused or reversed, but price increases on Chinese goods did not.
Price changes of imported goods by country of origin
Source: Cavallo et al. (2025). Note: Dashed vertical lines indicate major tariff events in March and April 2025.
If these trends among retailers translate into the broader US economy, then we know what to expect from the inflation data throughout 2025 in the US. In this case, the Fed has its work cut out.