Now We Know Who’s Paying the Tariffs
Producer prices surge, and real wages still aren’t rising fast enough.
By The Editorial Board
Shipping containers at the Port of Los Angeles, Feb. 20. Photo: Kyle Grillot/Bloomberg NewsPresident Trump knows the public is skeptical about his tariffs, which is why Administration officials are anxious to convince voters someone somewhere else in the world will pay for them instead of American households. Inflation data released Thursday tell a different story.
The producer-price index (PPI) in July rose 0.9% in the month and 3.3% over the last year.
Consumer-price data released Tuesday (0.2% monthly and 2.7% for the last 12 months) implied households weren’t experiencing tariff-induced price increases, except in some services such as medical care.
The PPI numbers tell us this is partly because companies are paying higher prices but haven’t passed them on to customers—yet.
The producer-price data get worse the closer you look.
Goods and services both experienced substantial inflation, of 0.7% and 1.1% month-on-month respectively.
Goods and services related to business investment in particular are becoming pricier, with the cost of manufacturing equipment rising 0.4% in one month and related services 4.5%.
Prices for intermediate goods—components and raw materials—are also on the rise.
Prices for materials used in durable-goods manufacturing increased 1.3% in a single month, and components for manufacturing increased 0.4% in the month.
This hasn’t shown up in consumer prices so far because many companies entered the Trump tariff era with large cash reserves or wider margins, so they can absorb these costs for the time being.
But these companies can’t do this forever.
Meanwhile, cash lost to paying tariffs or paying tariff-induced higher prices isn’t available for reinvestment in the business, or to return to shareholders.
Perhaps this is one reason Wall Street reacted badly to the producer-price news.
Another big reason is that Tuesday’s consumer-price data had fueled optimism that the Federal Reserve might be able to declare “mission somewhat more accomplished” on inflation and cut interest rates starting next month.
Today’s producer prices tend to become tomorrow’s consumer prices, however, so the Fed may find it has less room to maneuver than many hoped.
All of this poses a political problem for Mr. Trump and Republicans.
The President promises voters that foreigners will pay for his tariff policies.
These price data caution that the economy may have other ideas.
Americans will pay a big chunk of the tariff bill, either directly via higher consumer prices or indirectly via less business investment in productivity growth to increase wages.
The other warning sign for Mr. Trump this week is real earnings data that’s failing to achieve lift-off.
Inflation-adjusted average hourly earnings rose 0.1% in July after zero in June, and the 0.4% monthly growth in May and March could be blips instead of a trend.
Real average hourly earnings rose only 1.2% over the last 12 months.
Inflation is a broad-based, persistent increase in the general price level.
Tariffs in that sense aren’t inflationary unless the Fed accommodates them with over-easy monetary policy.
But tariffs do raise prices on tariffed goods, which can mean a one-time surge with some potential downstream effects.
What matters for voters, and for their confidence in the economy, is what they see in their own paychecks and cost of living.
Republicans are in the political danger zone if tariffs cause price increases—one-off or persistent—that aren’t offset by bigger wage gains.
Republicans will make the same mistake as the Biden Administration if they keep telling voters everything is fabulous but the evidence at the grocery store or Applebee’s tells them something different.
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