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.