On April 2, 2025, referred to as “Liberation Day” by the White House, President Donald Trump announced so-called reciprocal tariffs on countries worldwide; however, many economists contended that the tariffs were not reciprocal but rather much higher. About a week after Liberation Day, President Trump announced a 90-day pause on the excessive rates and reduced the tariffs to a still-high 10 percent for all countries, plus a few notable exceptions.
The 90-day pause for most countries ends on July 9, although the White House has agreed to extend the deadline for countries demonstrating “good faith” in trade negotiations. For example, China, which has been burdened by the highest tariff rates, had its pause on some of the new tariffs extended to August 14, 2025.
Before Liberation Day, the effective tariff rate hovered around 2.25 percent. Following the announcement, tariffs spiked dramatically to an effective rate of between 14 and 15 percent. (The effective rate is calculated by dividing the revenue raised by the dollar amount of goods tariffed.)
Typically, each percentage point rise in tariffs contributes roughly 10 basis points (0.1 percent) to the Personal Consumption Expenditures (PCE) inflation index. Sustained tariffs at current rates could elevate inflation from its current 2.3 percent to approximately 3.5 percent within a year.
A 3.5 percent inflation rate is directionally similar to the Federal Reserve’s projection. The Fed updated its Summary of Economic Projections on June 18, and in it, they cited an expected PCE inflation rate of 3.0 percent in 2025, up from its 2.7 percent projection in March 2025.
However, many pundits contend that a significant rise in inflation is unlikely and that predicting anything other than low and stable prices is overstating the potential outcome of prices. While I disagree, I can understand the view that inflation will remain low or even trend lower. After all, tariffs are a tax hike that threatens the growth of the U.S. economy, leading to reduced household and corporate consumption. That reduced demand could put downward pressure on prices. Also, the momentum of prices has been stable to downward. On June 27, PCE came in at 2.3 percent, close to the levels of the last couple of months and down from the start of the year.
Nonetheless, I doubt that inflation will remain in the low-to-mid two percent range; a PCE in the three percent range seems more likely. U.S. corporations imported many of their goods before Liberation Day, but once that pre-tariff inventory is sold off, businesses will have to contend with higher product costs.
Small businesses will be the first to pass those costs on to their customers. Large companies have more flexibility in how to contend with post-Liberation Day and import prices. Aggregately, the profit margins of S&P 500 companies are at near-record highs. In the first fiscal quarter of 2025, the blended profit margin for these companies was 12.4 percent, which was lower than the margin in the previous quarter but higher than the year-ago margin and the five-year average. (Profit margins for these companies hit 13.54 percent in the first quarter of 2021 and finished 2024 at 13.6 percent; the S&P 500 profit margin has more than doubled from five percent in 1990.) Corporations’ ability to eat higher taxes is, admittedly, another reason why I could be wrong about my expectations of higher inflation. They can eat it; I just doubt they will.
Aside from history and mathematics, there is currently no evidence to suggest that I will be right in expecting higher prices. That sentence was written in a sarcastic tone, but clearly, the inflation data year-to-date has been subdued, with limited signs of a tariff pass-through to consumer prices. Some of that is explained by the decline in economic activity that began in the first quarter of 2025; weaker demand kept prices lower. However, the inventory imported before Liberation Day will dwindle, and restocking goods will be more expensive.
When will the tariffs affect your costs? The apparel industry provides some insight into potential developments and future possibilities.
Apparel prices have fallen in the past two months despite being one of the most import-intensive consumer goods. Apparel prices in the Consumer Price Index (CPI) declined 0.4 percent in April, marking the second consecutive monthly decline and bringing the year-over-year decrease to one percent. Lower apparel prices are consistent with foreign producers bearing some burden of tariffs, but how long will that last? The tariffs are likely to have a more dramatic impact on the pricing of apparel and other goods in months if not weeks. The Fed’s Beige Book included a reference in the Boston District on repricing:
Companies are expecting to pass at least some of their tariff-related costs onto consumers in the coming months. Companies with lower profit margins, however, such as Walmart and Target, may have to pass on all, or at least most, of the tariff cost.
Walmart has done a good job of raising its net profit margin on a relative basis, from 2.13 percent in 2022 to 2.75 percent today; however, on an absolute basis, Walmart’s margins are considered thin, retaining less than three cents as profit for every dollar of sales. Target’s profit margins are a bit higher, at 3.95 percent.
U.S. households spend approximately $462 billion annually at Walmart and an additional $105 billion at Target. It is hard to believe that those two stores would operate at a loss. Instead, I expect most companies to do what they did when inflation was surging in 2021 and 2022: namely, raise customer prices at a rate higher than their corporate costs.
Take, for example, Nike, whose net profit margin was 11.10 percent in fiscal year 2024. On June 26, Nike reported that its profit and loss statement was impacted by $1 billion due to tariffs and the fact that the company has not yet increased its prices. Emphasis on “yet.” A recent survey from the Footwear Distributors and Retailers of America found that 55 percent of respondents expect to raise their prices by between six and 10 percent in 2025. Supporting the Beige Book anecdotes, ITS Logistics found that U.S. retailers have begun to reticket inventory by between eight and 15 percent.
The full impact of the Liberation Day tariffs is still unknown. Either the consumer will be hit or corporate profit margins will shrink, or, most likely, both. It is a recipe for a weakening economy and poses a threat to the stock market.
Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representation that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
