LIVE MARKETS- Shock absorbers that could limit tariffs' inflation impact - at least, a little

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SOME SHOCK ABSORBERS THAT COULD LIMIT TARIFFS' INFLATION IMPACT - AT LEAST, A LITTLE

Wells Fargo economists have looked at how new U.S. tariffs could impact inflation, and some possible factors that could cushion the hit to consumer prices compared to their impact in 2018-2019.

First, a stronger U.S. dollar could prompt foreign exporters to lower prices as dollar-based revenues would be worth more when converted back into their own currency. With expectations for the dollar to strengthen further this year, Wells Fargo sees potential for foreign companies to absorb at least some of the increased tariff costs.

Second, U.S. companies have more room to absorb higher tariff costs than during Trump's first term in office. Profit margins for goods industries are relatively much higher than in the 2010s, which means businesses may be able to avoid significantly hiking prices for finished products.

Finally, firms can try to stockpile imports ahead of when new tariffs take effect, which would at least temporarily avoid higher costs and give them time to adjust supply chains.

However, it's not so straightforward. For one, companies' overall profit margins are down relative to the last few years. Companies - not to mention investors - measuring margins in light of the recent past may choose to hike prices anyway.

On diversification, unlike in 2018-2019, companies have fewer options. Countries like Vietnam and South Korea, initial beneficiaries of moves away from China-based supply chains, are now under the threat of reciprocal tariffs. The Trump administration has also hit other tariff workarounds such as the "de minimis" exemption.

Wells Fargo calculations currently see a 6% rise in the effective tariff rate that would feed through to a 1.7% rise in annual goods CPI and a 0.6% rise in headline CPI.

Given the factors above, Wells Fargo sees U.S. core PCE inflation to remain around 2.8% this year and subside only gradually through 2026.

(Lisa Mattackal)

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