The Fed, businesses, and consumers are all concerned over price hikes.
Worried About Prices?
Please consider the Atlanta Fed research article Worried about Tariff Passthrough onto Prices? So Are Business Execs.
Over the past couple of months, newswires have focused on the potential for elevated tariff rates to feed through into higher inflation and potentially affect output growth as well. Indeed, Chair Powell, in his last post-FOMC meeting press conference said, “What looks likely, given the scope and scale of the tariffs, is that…the risks to higher inflation, higher unemployment have increased.“
Recent research from economists at the Atlanta Fed suggests that if firms are able to pass through all the costs of tariffs, retail prices would increase significantly―as much as 1.6 percent (depending on how effective tariff rates evolve from here).
And even at a 50 percent passthrough rate, the impact on prices would be large enough to be felt in the aggregate (0.8 percent increase in retail prices). How plausible is full passthrough? Going back to the last episode with rising tariffs in 2018, research icon denoting destination link is offsite showed that the cost of the tariffs was almost entirely passed through onto domestic prices.
In this environment, where policy changes lead to sharp increases in costs for many firms, we were curious about how firms would respond, especially in light of a potential reduction in demand that typically accompanies a price hike. So, we turned to the Atlanta Fed’s Business Inflation Expectations survey (BIE), a monthly survey of Sixth District firms that is well positioned to ask timely questions on economic conditions facing firms. In gathering information for the April 2025 BIE survey, we asked firms about their ability to pass through increased costs caused by a new economic policy without a resulting reduction in demand.
The interesting twist in this line of questioning is the inclusion of the phrase “Based on current levels of demand.” The interpretation here is that firms are telling us how much of the cost increase they would be able to pass through to customers before it had a negative impact on demand for that good or service.
Although a diversity of views is apparent, on average firms tell us they expect to be able to pass through 51.1 percent of a 10 percent cost increase, and 47.3 percent of a 25 percent cost increase, without reducing current levels of demand.
In sum, firms with about normal or greater-than-normal sales expect to be able to pass through more of the cost increases while maintaining the same levels of demand for their goods or services. And figure 3 shows us that those firms are more likely to be larger firms, due to their smaller sales gap compared to “normal.” In the aggregate, business executives see their current sales levels as about 8 percentage points below “normal,” which is much weaker than firms’ relative position entering 2018. In this environment, firms on average anticipate passing through a little more than half of a 10 percent cost increase without damaging demand. It’s not yet clear where the average tariff rate will ultimately settle, or how firms’ passthrough rates will evolve from here. However, it does appear that most firms anticipate sacrificing demand should they choose to fully pass a tariff-related cost increase on to customers.
Only Three Things Can Happen
- Corporations can pass on the tariffs
- Corporations can eat the cost
- A combination of the above
The Results
- To the extent corporations pass on the costs, consumers will pay the tariff. That means consumers will cut back somewhere else, exhaust savings, or go into debt.
- To the extent corporations eat the costs, that’s a direct hit on corporate profits.
- If corporations misjudge how much they can pass on, they will also take a hit on profits.
Corporate Profits
If you are thinking tariffs are a huge drain on aggregate corporate profits, then you are thinking correctly.
Fed Beige Book Shows Only 3 of 12 Regions Growing, 6 Declining
On June 5, 2025, I noted Fed Beige Book Shows Only 3 of 12 Regions Growing, 6 Declining
This report reeks of stagflation, defined as rising prices and recession simultaneously.
Prices
Prices have increased at a moderate pace since the previous report. There were widespread reports of contacts expecting costs and prices to rise at a faster rate going forward. A few Districts described these expected cost increases as strong, significant, or substantial. All District reports indicated that higher tariff rates were putting upward pressure on costs and prices.
ISM Services Dips Into Contraction as New Orders and Backlogs Plunge
On June 4, I noted ISM Services Dips Into Contraction as New Orders and Backlogs Plunge
“The Prices Index registered 68.7 percent in May, a 3.6-percentage point increase from April’s reading of 65.1 percent; the index has elevated 7.8 percentage points in the last two months to reach its highest level since November 2022 (69.4 percent). This is the first time the index has recorded this high of a two-month increase since a 9.2-percentage point gain in February and March 2021. The May reading is also its sixth in a row above 60 percent.”
What caught my eye was a plunge in new orders and backlog of orders, yet prices rose 96 consecutive months and just accelerated.
Should the Fed Cut? Hike? Do Anything?
Many say the Fed should cut because jobs are slowing and so is inflation.
But on the basis of tariffs and general disagreement about the rate of inflation, many others stating the Fed should hike rates.
Those who are open to either stagflation or economic collapse don’t think the Fed should do anything.
I am in that camp with the side note the free market should set rates, not the Fed, not Congress, not the President.
Is the Fed in a Good Spot?
That’s what the Fed says. I am not in that camp.
The economy can tip either way suddenly and severely. And Trump’s tariff whipsaws don’t make the Fed’s life easy.
Fear of Making Mistakes
The Fed does not want to make a policy error in the wrong direction especially after blowing the massive inflation response to Congressional free money coupled with inane QE by the Fed.
So, the Fed cannot be proactive now, even if it wants to, due to FOMMtm
Trumpian Howls
The Fed has its Covid mistake in the back of its mind but a howling Trump in the foreground.
Trump howled about Jerome Powell again on June 4, as noted in Trump Demands Fed Rate Cut After Weakest ADP Payroll Report in 2 Years
ADP reported a slim 37,000 private payroll rise for May.
The payroll report on Friday temporarily halted the howls.
For discussion, please see Nonfarm Payrolls Rise by 139,000 Employment Declines by 696,000
The Fed may easily overreact or underreact. Right now the Fed looks like a deer in headlights.
Finally, the Fed will take a lot of criticism no matter what it does. And it will still have its recent policy mistakes in mind, while also having to deal with Trump.
Is this really a good place for the Fed?
Thank god our TACO President has made trading in the stock market easier than shooting fish in a barrel. Make money faster than he can make things more expensive, problem solved!
The Fed is continuing to remove liquidity at a slow rate and that indicates that they are tightening a tiny bit. Yield spreads are OK and auctions are (mostly) well received. Considering the wild swings in announced tariffs and Taco’s continual waffling we are slowing, but only marginally.
Stagflation is knocking on our door as prices for imported items rise. Gas has gone up in my area because of the Trump tariffs on oil products imported from our former ally ~ Canada. Are gas prices lower in a majority of the country and not here? This is possible as I have curtailed travel plans while making preparations for a possible protracted slowdown. I would think that with oil at $63 per bbl it should be down across most of the country.
Summertime violence in larger cities is likely given trumps social agenda and the MAGA cult members attacking anyone they perceive as “liberal”. Even as a Libertarian leaning former Regan Republican I was threatened by a MAGA Porsche collector who stated “I will shoot you in the face if I see you again”. So I have stopped taking my collection of investment cars to shows.
This is not all bad as my farm has seventeen neighbors and it is good to get to know all of them. Barbecue and beer sure do help people bond together, regardless of differing politics, especially when presented with “Lets look after each other under any circumstance”. Community… A good backup plan…
The social unrest in LA is from the other side is dangerous and with the military suppression and TV coverage, likely to spread. Sucks to be around any of this divide.
One of the things I have learned over the years is the immense power of our banking system. It is the real seat of power in the world. Hamilton got that one right when he designed our banking system and left politics to Washington and moved the heart of banking to New York City. We will see if they continue to support trump with relatively low interest rates and adequate liquidity.
The real tell is the heart of this article… What is the Fed going to do?
The Fed is following trumps antics closely to see the results of his tariff tantrums. They seem to have decreasing headline impact and the VIX has cooled off nicely. Nicely enough to take on some protective longer dated, out of the money positions with some real volume of calls.
Carry on ~ we live in interesting times!
let California cut a free trade zone deal with china and mexico and canada…….let KEY WEST TO BANGOR MAINE become. WEST ZION WITH GRAND REBBE DONALD J. TRUMP for life.
In 2008 the rise in oil prices was misconstrued to mean that the FED should stay tighter. Same thing happening today.
I thought that gas prices were going down on a national level. Crude is down to $64.50 per barrel.
The Fed needs to make rate cut decisions based on wage increase data, not (bogus, random) unemployment figures. The Fed will know it is time to cut rates when average annual wage increases fall below 2.5%, and *only* when average annual wage increases fall below 2.5%. Wage increases are a direct measure of actual market forces, rather than all the other “chase your tail” metrics they use.
Does anyone seen data on the impact of customers switching to US made items from international? I have seen several articles on US firms whose business has significantly grown with the announcement of probable tariffs.
I have seen such reports but isolated cases.
More businesses shutting down or considering that
We’re trying to buy more products made in the USA, especially large purchases. Washer, dryer, vacuum and flag/flag pole. My 1st priority is quality so I’m willing to pay more money.
If you only look for the pros and never seek out the cons, you’re going to think everything Trump does is genius.
That’s another fine mess you got US into Donald.
The Fed should wait and see. Just like Fox went on an “inflation is going wild, expect to pay more” to bring down Biden, CNN and MSNBC will do the same to bring down Trump. Corporations want people to believe inflation is going up so they can increase prices and point the finger at the government. Go long stocks. I made a bundle under the Biden inflation, hoping to do the same under the Trump inflation.
Trump does not need CNN and MSNBC to take him down. He is doing that all by himself by being such a bed wetting old fool!
Most people don’t rightfully care. The better question is where is the average Joe in this mess?
On the tariff end, it means higher priced goods or lower availability of goods & services. A lower quality of life.
On the jobs end, it means less jobs, lower pay for most and possible better pay for the few elite that benefit from the tariffs. A lower quality of life for most.
On the grand scheme of things, it’s bad for everyone. The bond market has had conniption fits and one really bad fit can send it into spasms and seizures that can bring global economies down. A lower quality of life for most.
The right thing to do is be diversified, hedged, profiting, and have an exit strategy.
“The US is not currently in stagflation”
US Is In Hyper-Inflation.!
Almost Everything Has Doubled Under The Democrats/Rhinos Warmongers.
Post-Bush/Cheney Patriot Act + Post-Obama/Biden NDAA = UniParty Warmonger$$$
Housing, Rent, Insurance, Property Taxes, Health Care, Groceries, Gasoline, Diesel, Vehicles, Utilities, Wood/Building Supplies, Etc.!
Core Inflation – Excludes ‘Volatile’ Food & Energy Prices.!
Prices Will Now ‘Triple’ Under Sanctions & Tariffs.!
37 Trillion National Debt + Adding 4-5 Trillion a Year. Trillions In Bailouts (FED) – Trillions Missing Pentagon MIC – No Audits.!
The Fed is in a bad place. They normally would cut with data like this but they can’t because of the tariffs. The US is not currently in stagflation, but the Fed is essentially in the same position as if it were. The saving grace is that it’s driven by policy decisions that can be quickly reversed.
The FED was never worried about housing inflation and affordability. It was pedal to the metal printing, while crowing about inflation tooo looo.
Suddenly they worry about it. Either a bunch of morons or political hacks.
You mean the same Fed that said inflation was going to be transitory?
“Only Three Things Can Happen”
Let’s break that three things out into real world. There are at potentially five “eaters” of tariffs:
The foreign producer
The foreign exporter
The domestic importer
A domestic distributor if different from the importer
The consumer
Everyone knows 145% was not going to stick around long enough to effect consumer prices. Virtually no one, even the Fed knows what’s going to happen. It’s going to take 3-5 more months to get a real idea of the slope of “passed through” costs to the consumer in a macro sense.
And I love the use of the much lower ADP number instead of the real much higher number.
The sky is not falling. Far from it. The Fed can fret all it wants. Until there are clear signals of real inflation across a broad spectrum of important items that people really need like medicine, auto parts, appliances, etc, then I will continue to default back to the seared into my brain transitory fiasco.
And here’s the big ugly reality. We remain in an environment (i.e., solid economy) whereby some importers are simply going to pass along 100% of their cost increase to the consumer simply because they can.
Personally, I think Trump & the GOP could survive a mild recession with sub 5% unemployment. For example. a mild recession would go a long way towards forcing builders to stop selling homes at jacked up prices that’s forcing buyers to finance rate buy downs to the tune of $25-40K.
fed has only one mission. to keep their shareholders solvent. look up who owns the FEDRESNY. it ain’t a conspiracy. just the facts girls.
That is absolutely correct, and the very purpose of the Fed. Banking, by its nature, is inherently unstable leading to whipsaw economic crashes (as we saw every decade before the creation of the Fed). The Fed’s role is to regulate the financial health of the banking industry while being a lender of last resort when banks go off the rails (as they did during the Great Recession). The Great Recession was directly caused by Alan Greenspan believing the Free Market could regulate the banks instead of the Fed. When you forget history, you are doomed to repeat it.
correct. thanks. mish and most think fed is stupid or smart or whatever BS. but in reality the FED in NY which is where the power is, is owned outright byy the nyc banks mostly and some other affiliates. privately owned. they don’t give a fuck about unemployment…………or tariffs………
Exactly how did the Fed’s free market approach to setting interest rates cause the Great Recession? To ask the question is to answer it. If there is a central bank in existence setting interest rates, then there is no free market dynamic at play. Banking is not necessarily inherently unstable. Fractional reserve banking is, but 100% reserve banking is not. Mish has blogged before about this.
The Fed *is the cause* of the business cycle.
SMH
If we think corporations won’t pass down the costs to the consumers, we’re crazy.
you mean you don’t trust the plan. walmart and jpmorgan and chevron and mcd all have shareholders now in the charity business. the amerikan maga man is almost like a reverse darwin evolutionary link. maga is going back to the ape………with their silver backs taco boy and elon the bastard making druggie.
The Fed always hits the nail on the head. Errrrr.
All signs point to a recession followed by lower prices. Gas prices have declined rapidly the last month. Demand for goods is down. Airlines are canceling routes due to no demand. The layoff cycle has started and will feed on itself. Real estate prices are starting to crater.
Declining gas prices are great for reduced inflation. Demand for what goods are down? By how much? If airlines are canceling routes, then that means reduce fares are not far behind. Again, great for inflation. In addition we are in the tail end of a gigantic expansion, so some slowing is to be expected. The question is if / when the cliff moment arrives. If (granted it’s a big if) Trumps achieves reasonable success to re-negotiating trade deals by Oct, then there’s a good chance we’re off to the races. Can China hang on that long?
As for layoffs, this is simply made up. Here, I’ll make a conjecture that holds as much weight as your unsupported conjectures. There’s a very real possibility that a significant portion of layoffs this year are adjustments businesses are starting to make due to evolving AI strategies. And if I’m reasonably in the ball park, then we’ve got big, big problems headed our way in the next few years that have nothing to do with Trump’s policies.
Let’s wait & see what the corporate profit margins for Q2 look like. Granted, Q1 was down 2.9%, but that could have EASILY been the result of companies spending a lot extra on building inventories ahead of tariffs. Now for possibly 1-2 quarters, they’re not going to buy nearly as much, potentially boosting their bottom lines in Q2. Q3 will be when we see the real trend appear.
Real estate prices are not cratering broadly. There are only about 10 major markets in the US seeing meaningful price declines over the last two years.
From that other guy, WS:
“For the US overall, for the entire market, the median price of all single-family homes was up on a year-over year basis by 1.7% in April.”
Can China hang on until October?? China isn’t the land of instant gratification, the USA is. It’s why we lose all of our wars. The other side keeps fighting and we go home.
Every month that passes whereby the US is buy a lot less stuff from China is going to make things worse for them.
Can China hang on that long? Have you ever looked in a mirror? Simple yes. Amazed you would posit such a simply answered question. They’ve prepared for this for YEARS. Eight years ago they exported over 19% of their exports to the USA, now it’s over 1/3 lower under 13%. Pay attention.
some are canceling routes because the new planes needed became too expensive with the tariffs
I am so glad that Mish has warmed up to the fed . I am sure they know what they are talking about after all they sure didn’t see inflation exploding 3-4 years back when they had interest rates at or near all time lows and created the housing bubble , highest inflation in 40 years . Latest inflation numbers have been the best in 4 years but high inflation is what the fed is worried about now. Thanks for the warning Mish .
They did not force Yellen to make such a terrible error refinancing at the wrong end of the curve
Should investors be preparing for a US stock market crash in 2025?lets ask Mish
https://uk.finance.yahoo.com/news/investors-preparing-us-stock-market-070100352.html
The Fed is balancing on a high wire. At the moment the Fed fund rate is a hair above the 1 month T-bill rate, but the 10 year US bond rate is now higher than when the Fed began lowering rates in September ’24. The bond market clearly anticipates higher inflation in the future. The Fed is effectively stimulating the economy and needs to raise rates to curb inflation.
There is no way to effectively model what rates need to be in the face of random and massive tariff changes on a daily basis. Trying to follow them will actually impact confidence. Best they can do is hold steady and wait till effects are clear.
My first reaction was “They’re not worried about inflation–this is the same Fed that let rates sit too low and now housing is basically 2x 2019 prices and the ISM report you show has services prices increasing 96 consecutive months, now faster”. Same fed that has willilngly supplyed a $37 trillion-indebted fiscally irresponsible Congress with the financial noose, secretly knowing the inflation statistics are underreported.
However, your newly trademarked Fear of Making (a) Mistake–FOMM (Nice!), if true, might get them to hold off on any new goosing things worse by lowering rates here. Heck, holding rates steady is the closest thing to a Fed scared outta their minds. Their skew has always been LOOSER over tighter.
I know folks that would like to move but they can’t vacate the 2.x-3.x% mortgage as the only house they could afford at comparable monthly mortgage price is a “tiny house” in a bad location.
Until and unless housing prices move lower, that is a huge issue. Boy they really destroyed that market, unless of course you’re a seller not in need of replacement housing.
On a personal note I just forego purchases, lengthen times between necessary services. But if one scanned only the equities market, there is not one damn thing we should be worried or writing about, they are pricing perfection in a world that looks closer to a war footing and political polarity in a long time, a world where even the Fed’s normal hubris is on the back burner.
“secretly knowing” is just conspiratorial thinking. You can easily make a case against them without the tinfoil hat.
Are you an AI bot? In context, saying the Fed “secretly knows” is not conspiratorial. He could have worded it “privately knows” or just “knows”. Most people realize the reported inflation rates are understated.
Consipiracy wasn’t intended. The case against them is all around us. Secretly was probably a poorly chosen word. One could use the official figures and apply it to any number of products and services and realize it is underreported, conveniently providing political cover to skew rates lower. They aren’t alone – debt levels could not reach these proportions in the US, Europe/UK, personal, corporate, public, private without rates being lower than would occur naturally.
the r/e taxes are gonna be jacked up in coming years bigger than they have been. the Trump regime will steal everything not nailed down in the empire. like happened to crumbling empires everywhere. we are already 90% to the full argentina affect. if you don’t have gold you will be destroyed by hyper inflation in the coming 5 years. this ain’t rocket science. i did that at NASA for a little bit.