One hallmark of the new trade era is the consistent argument that tariffs will be paid by the exporter. The July producer price index, to be released on Thursday, should provide further evidence that this is probably not the case.
There are four points along supply chains where costs can be absorbed: exporters, importers, retailers and consumers.
Of the four, importers, retailers and consumers are all domestic sources that absorb costs.
One can already observe the impact of tariffs on domestic auto producers and rising goods inflation inside the consumer price index data.
For this reason, it is certain that most of the initial costs of tariffs are being absorbed by domestic firms and households.
If foreign producers and exporters are indeed paying the costs of tariffs, then one should observe outright declines in producer prices.
Get Joe Brusuelas’s Market Minute economic commentary every morning. Subscribe
But producer prices are rising, not falling, as the chart shows. And they are likely to rise further over the next year as the effective tariff rate, which will reach 17.6% starting on Oct. 5, begins to show up in the data.
The consensus of economists suggests that the cost of goods as they leave their source of production will have increased in July by 0.2% to a 2.5% yearly rate.
This increase would be up from the producer price index’s 2.3% yearly rate of growth in June.
The RSM forecast is slightly higher, with PPI for July growing by 0.3% on the month and by 2.6% on a yearly basis.
Producer prices tend to lead consumer prices on their way up and on their way down.
This implies that as the impact of inventory accumulation recedes and as tariffs flow through the supply of intermediate goods, we can expect producer prices to drive consumer prices higher.
