By Andrew Welsch

President Donald Trump's tariffs are already increasing prices on consumer goods. More price hikes could be ahead. But when and how much prices will rise depends on the product and the knock-on effects of the tariff regime, Paul Donovan, chief economist at UBS Global Wealth Management, said Wednesday. Of course, it also depends on how long the tariffs stay in place and at what level, which is in flux.

Trump's announced levies on trade so far have cumulatively lifted the effective tariff rate to roughly 25% from 2.5% at the start of the year, but are expected to be negotiated down from here. Donovan estimates that a 10% increase in tariffs could raise price levels by about 1.1%. He doesn't expect companies would raise prices gradually over time, but would instead opt for one-time increases to compensate for the hit to their profits.

However, second order effects, including price-led inflation, could persist at the retail level, he said on the call with members of the media. "If consumers believe prices are increasing, then retailers can push through price increases because their customers are expecting it as a concept."

The behavioral component, meaning how businesses and consumers react to both price hikes and the anticipation of further increases, makes it hard to judge risks, he said.

Delayed impact. The impacts will begin showing up in economic releases in the coming weeks, Donovan said. "On average I would expect something to show up in June price inflation data," he said. "But the perception is already shifting."

When prices move depends on product shelf life, which varies widely, and that affects how soon companies have to react to tariffs. Some companies stockpiled inventory in advance of tariffs. Many consumer items are shipped overseas and the supply chain takes weeks. In contrast, "The life span of a head of lettuce is a matter of days," Donovan said.

Donovan notes that recent consumer surveys show higher inflation expectations and a gloomy economic outlook. Some surveys also show a partisan split with Democrats and independents anticipating higher rates of inflation than their Republican peers.

The University of Michigan's consumer sentiment index for April showed that Americans anticipate inflation for the year ahead to jump to 6.5%. That's the highest reading since 1981.

Donovan said that he doesn't expect tariffs to remain at significant levels for a prolonged period, but if they did, the impact would be initially inflationary, but then disinflationary because economic growth would slow.

Federal budget impact. While tariffs, like other tax increases, will increase revenue to the U.S. government, the impact on consumer prices may be larger than the benefit to federal coffers, Goldman Sachs economists explain.

"[P]rohibitively high tariff rates on imports from China will shift import demand away from China toward countries with higher production costs but lower U.S. tariff rates," Goldman Sachs researchers led by Chief Economist Jan Hatzius wrote in a May 7 note. "This was true in the last trade war as well, but the tariff differential is now vastly larger -- 145% for China versus just 10% for most other countries. That shift will also raise U.S. prices, but without a commensurate increase in the effective tariff rate."

Economic outlook weakens. Worsening economic forecasts by many Wall Street economists are a sharp contrast to the beginning of the year when the economy was on strong footing, inflation had declined substantially, and businesses were projecting confidence about economic expansion.

Some companies have already begun raising prices. For instance, Ford Motor is increasing prices on several 2025 models, Microsoft is increasing Xbox prices, and Mattel has indicated toy prices will go up. Several luxury brands have announced they would be hiking prices.

Other companies, even those not directly affected by tariffs, have suspended earnings guidance due to the significant economic uncertainty wrought by trade policy changes. For example, Southwest Airlines, American Airlines and Alaska Air pulled their 2025 guidance.

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 08, 2025 11:50 ET (15:50 GMT)

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