LIVE MARKETS-Tariffs bite quietly, but the pain is spreading

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TARIFFS BITE QUIETLY, BUT THE PAIN IS SPREADING

U.S. tariffs are acting less like headline shocks and more like slow-burning taxes on consumption and production, according to Morgan Stanley economists.

In their August 20 note, the bank highlights that while the average effective tariff rate on U.S. imports stood at just 8.9% in June, well below the expected 16%, the inflationary impact is already visible in goods prices.

The lag is driven by corporate mitigation strategies. A Morgan Stanley analysis of second quarter results showed companies are deploying a mix of mitigation strategies: rerouting supply chains, stockpiling inventory, and selectively raising prices.

Apparel and furniture are among the hardest-hit sectors, facing tariff rates of 24% and 16%, respectively. Yet many firms are absorbing costs to protect margins, delaying price hikes and investment decisions, per report.

Products used in the production process, such as paper products, pharma, and chemicals, saw much lower rates.

"Businesses are already incurring much higher tariff costs, and these will flow through into both the final goods sold and the costs of production," said Arunima Sinha, global economist at Morgan Stanley.

"At the same time, the fact that businesses are adopting multi-pronged strategies, which include absorbing part of the tariff costs, means there could be an impact on labor market hiring decisions of firms in the coming quarters."

Earlier this month data showed imports into the United States fell more than expected in June, as uncertainty over shifting tariff policies weighed on retailers, according to data from the National Retail Federation.

The brokerage warns that the full pass-through of tariffs could take months, potentially lifting goods inflation and cooling labor demand in the second half of 2025.

(Akriti Shah)

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