- As businesses pass down the cost of tariffs to consumers in the form of raised prices, the New York Federal Reserve found that as of last month, many businesses were also raising prices on products unaffected by the levies. Economists said these pricing choices are taking advantage of the uncertainty of unpredictable tariffs, but could worsen the potential for inflation.
Not only are companies ratcheting up prices of imported products to offset the cost of tariffs, they’re also raising the cost of goods unaffected by those taxes, a New York Federal Reserve survey and Beige Book report released Wednesday found.
The survey was administered to about 110 manufacturers and more than 200 service firms in New York and New Jersey between May 2 and May 9. At the time, Trump had not yet reduced tariffs on China from 145% to 30%. An increase on levies for steel and aluminum from 25% to 50% went into effect on Wednesday.
The Trump administration is also preparing for a Supreme Court showdown on the constitutionality of the tariffs, following a U.S. court back-and-forth on whether the president had the authority to impose the taxes.
A “significant share” of companies surveyed by the Fed in early May said they increased prices of products not impacted by President Donald Trump’s sweeping levies, part of a strategy to brace for the wider impact of the taxes.
“A heavy construction equipment supplier said they raised prices on goods unaffected by tariffs to enjoy the extra margin before tariffs increased their costs,” the Beige Book report said.
Economists largely expected the tariffs to result in price hikes for businesses that are unable or unwilling to take a hit to profit margins, choosing instead to pass down the increased cost to customers, a tactic the Congressional Budget Office warned could be inflationary.
The NY Federal Reserve survey confirmed companies’ pricing intentions, with “most businesses” passing down at least some of the tariff costs in the form of higher prices, and about one-third of manufacturers and 45% of service companies “fully passing along” the price increases.
Price increases under the “cover of uncertainty“
Economists warn the strategy of increasing prices across the board, even on products unaffected by tariffs, could be an indication of companies feeling the pressure to manage continued economic uncertainty.
“[It could be] generic unpredictability. Taking advantage of a general inflationary environment could be another reason,” Susan Ariel Aaronson, research professor at George Washington University’s Elliott School of International Affairs, told Fortune. “No one knows what Trump is going to raise tariffs on or other trade barriers tomorrow. There is no consistency or predictability to his approach to trade, and the approach is not transparent, nor is it really motivated by market conditions.”
When companies feel the need to raise prices of a wider range of products in response to tariffs, “it’s making the potential of inflation ever greater,” Aaronson added.
Companies considering price increases will do so under this “cover of uncertainty,” according to Rebecca Homkes, lecturer at the London Business School and faculty at Duke Corporate Executive Education.
“We are going to see some companies try to do some stuff that maybe they’ve been sitting on,” she told Fortune. “Maybe you’re going to do layoffs, maybe you’re going to cut a product, maybe you’re going to raise the price on something you were just a little bit hesitant about.”
With so much uncertainty—and companies only able to make so many price changes per year—part of the decision to hike prices on a wide array of products may also have to do with trying to predict what products future tariffs could be imposed on, Homkes said. In other cases, businesses will consider what products customers order together. If one of those products is tariffed, but another isn’t, that company may still choose to raise the price of both products.
Homkes argues these price increases, though a hit to consumers, are a last resort for companies and take place only after a company has exhausted other options like absorbing costs.
“You have to pass these costs through,” Homkes said. “If they don’t pass these costs through, what does that lead to? That leads to less inputs, less hiring, including the need to lay off. So they’re taking all these variables into account.”
This story was originally featured on Fortune.com
