NY Fed finds half of firms still passing tariff costs to consumers

About half of companies still raise prices to pass through tariff costs a year after the levies, New York Fed economists wrote July 8, suggesting tariff-driven inflation will persist past 2026.

"The persistence of tariff pass-through well past the initial implementation date suggests these cost increases are becoming embedded in pricing structures," the economists wrote, noting the finding spans firms across multiple sectors.

The analysis comes as the New York Fed's Global Supply Chain Pressure Index eased to 1.25 in June from an upwardly revised 1.81 in May, though the reading remains elevated compared with the 0.9 level seen in December 2022. The bank's Survey of Consumer Expectations showed one-year-ahead inflation expectations rose to 3.7% in June from 3.5% in May, the highest since September 2023, while three-year expectations climbed to 3.3% from 3.1%.

The findings complicate the Federal Reserve's path to returning inflation to its 2% target. With half of firms still adjusting prices upward, the structural cost pressures from tariffs may keep core inflation elevated, reducing the scope for rate cuts and potentially forcing the Fed to maintain its current 3.5%-3.75% federal funds rate target range through year-end. OIS markets currently price a roughly 40% probability of a rate hike by December, according to CME FedWatch data.

The current average US tariff rate on Chinese goods stands at elevated levels following multiple escalation rounds since early 2025. The previous tariff increases disrupted supply chains and reduced bilateral trade flows, with the New York Fed's supply chain index spiking to 1.81 in May before easing last month.

New York Fed President John Williams said in a June 25 speech that "inflation is unquestionably elevated and well above" the 2% target, though he expressed optimism that resolving supply disruptions tied to the Middle East conflict would help stabilize energy and goods prices later this year. In a July 7 television interview, Williams said he felt "a little bit more positive about the near-term inflation outlook because of the energy price declines."

The tariff pass-through persistence adds a layer of complexity to that outlook. Unlike pandemic-era supply shocks that faded as logistics normalized, tariff-driven cost increases represent a structural shift in import costs that companies are choosing to pass on rather than absorb. For import-dependent sectors — including consumer goods, electronics, and automotive — the persistent pass-through points to compressed margins ahead. Companies that have already raised prices may face demand destruction if consumers push back, while those yet to adjust face a narrowing window to pass on costs before competitive pressures mount.

Inflation Expectations Highlight Sticky Price Pressures

The New York Fed's consumer survey data highlights the challenge. Five-year-ahead inflation expectations held steady at 3% in June, well above the Fed's 2% target, suggesting households expect price pressures to remain elevated over the long term. The stability of longer-term expectations has been a key argument for Fed officials who believe the public eventually expects inflation to return to target.

Fed Chairman Kevin Warsh said at his first press conference last month that "members of the Federal Open Market Committee are unambiguous and unanimous: This Committee will deliver price stability." The Fed left rates unchanged at its June meeting at between 3.5% and 3.75%, though several officials flagged the potential need for rate hikes later this year given inflation worries.

The cross-asset implications are significant. Sticky tariff-driven inflation would push bond yields higher as markets reprice rate expectations, with the 10-year Treasury yield potentially testing 5% if the pass-through persists. The dollar would likely strengthen on a relative rate advantage, further pressuring emerging-market currencies and commodities priced in dollars. For equities, the combination of higher input costs and elevated rates would compress valuations, particularly for consumer discretionary and industrial sectors with high import exposure.

The next key data point comes with the July consumer price index release on Aug. 13, which will show whether the tariff pass-through is accelerating or stabilizing. The Fed's next policy decision is scheduled for Sept. 16-17.

This article is for informational purposes only and does not constitute investment advice.