What a 10% Tariff Does to Consumer Prices: The New Pass-Through Estimates
On October 30, 2025, the United States and China agreed to a one-year trade truce in Busan. This agreement included the halving of the US fentanyl tariff to 10 percent and saw average US tariffs on Chinese goods fall from approximately 57 percent to between 45 percent and 47 percent, depending on the reporting source. During this period, China deferred export controls for one year. As the truce approaches its renewal period (the two sides agreed in September to extend it by about two months), the impact of these trade barriers on domestic consumer prices remains a subject of significant debate among economists.
The Disparity in Pass-through Estimates
Recent research presents conflicting views on how much of a tariff increase is eventually reflected in the prices consumers pay. A study titled "The Anatomy of Tariff Pass-through into Consumer Prices" by Mary Amiti, Sebastian Heise, and David Weinstein, published as an NBER Working Paper (w35561), suggests that the pass-through rate is not absolute. Their findings indicate that roughly 26 percent of a tariff increase passes through to consumer prices. This estimate is calculated relative to less-exposed goods, assuming that aggregate economic conditions remain fixed.
In contrast, data from the Federal Reserve suggests a much higher rate of transmission. According to a Federal Reserve FEDS Note from April 8, 2026, pass-through was effectively complete in certain contexts, with tariffs contributing to a 3.1 percent increase in core goods PCE prices through February 2026. These numbers measure different things: the NBER paper reports the share of a tariff increase that reaches consumer prices (about 26 percent), while the Fed note reports that pass-through was effectively complete and that tariffs raised core goods PCE prices by 3.1 percent. The methods differ, so the figures are not directly comparable. The effect of tariffs is better read as a range than as a single number.
One likely source of the gap is that the NBER paper measures prices relative to less-exposed goods while the Fed note measures an aggregate index; the sources describe the methods as different.
Key Insight
The Temporal Dimension of Price Transmission
The speed at which a tariff reaches the consumer depends on the nature of the cost increase. The NBER/CEPR study distinguishes between direct and indirect effects. The direct effect, which accounts for 64 percent of the total price increase, is characterized by its rapid transmission to consumer prices. These are the immediate costs associated with the change in import duties.
The remaining effect is indirect, stemming from shifts in input costs and domestic markups. This indirect component takes significantly longer to manifest, typically requiring a window of nine to twelve months to fully impact consumer prices. This delay occurs because firms must navigate longer supply chain adjustments and renegotiate contracts to reflect the increased costs of intermediate goods.
Retailers demonstrate a similar, though distinct, timeline. Analysis reported by Fortune suggests that if a retailer's acquisition costs rise by $1 due to tariffs, they typically pass the full $1 increase on to the consumer approximately seven months later. This seven-month window sits between the rapid direct effect and the slower twelve-month indirect cycle, representing the time needed for retail pricing strategies to catch up with supply chain realities.
| Source | Context | Estimated Pass-through | Timeframe | Scope |
|---|---|---|
| NBER/CEPR Study | ~26% | ~1 Year | Relative to less-exposed goods |
| Federal Reserve Note | Effectively Complete | Through Feb 2026 | Core Goods PCE |
| Retailer Analysis (Fortune) | ~100% ($1 to $1) | ~7 Months | Retail price adjustment |
Methodological Divergence: Relative vs. Aggregate Effects
Understanding why these estimates vary requires looking at the underlying methodology. The NBER/CEPR findings focus on how the price of a tariff-exposed good moves in relation to goods that are not exposed to those same tariffs. This approach measures the relative cost burden. If a tariff increases the price of a specific imported good, but other non-tariffed goods also rise in price due to general inflation, the relative pass-through might appear to be only 26 percent.
The Federal Reserve's observation of "effectively complete" pass-through relies on a different metric: core goods PCE (Personal Consumption Expenditures). This measures the aggregate change in the prices consumers pay for a basket of goods. When the Fed notes that tariffs raised core goods PCE by 3.1 percent, it is looking at the total impact on consumer spending. This suggests that while the relative impact on specific goods might be moderated by other economic factors, the actual cost burden on the consumer's total expenditure is much more direct and significant.
The Mechanics of Retailer Margin Compression
The Fortune summary reports a seven-month lag between a tariff-driven cost increase and the matching retail price increase. In my analysis, firms holding inventory bought before a tariff can delay the cost hit, and margins can be squeezed until prices catch up. The sources reviewed do not measure retail margins, so this remains an inference.
Economic Scenarios for the 2026 Trade Environment
As the Busan truce renewal approaches, two primary scenarios emerge for how new or renewed tariffs might impact the economy. These scenarios represent the range identified in the current research.
In the first scenario, characterized by the NBER/CEPR findings, the pass-through remains partial. In this environment, consumers might see the relative price of specific tariff-exposed goods rise, but the overall inflationary impact on a broad basket of goods remains contained because the pass-through is only 26 percent of the tariff's value. This would suggest that domestic competition or the substitution to less-exposed goods effectively dampens the inflationary signal.
In the second scenario, aligned with the Federal Reserve's core goods PCE data, the pass-through is much more comprehensive. In this case, the tariff acts as a direct driver of aggregate inflation, with prices for core goods reflecting a high percentage of the tax increase. This scenario would place more immediate pressure on consumer purchasing power and would require more aggressive policy responses to manage inflation expectations.
Strategic Indicators for Economic Actors
For decision-makers, the current lack of consensus on pass-through rates necessitates monitoring specific indicators to distinguish which scenario is unfolding. Managers, investors, and policymakers should watch the following metrics:
- Input Cost Parity: Monitoring the gap between import prices and domestic producer prices can reveal the speed of the indirect pass-through effect.
- Core Goods PCE Trends: Real-time tracking of core goods PCE can help determine if the "effective completeness" seen by the Federal Reserve is becoming a persistent trend.
- Inventory Turnover and Pricing Lags: For retail investors, tracking the seven-month window between cost increases and retail price adjustments will be critical for predicting margin stability.
- Substitution Patterns: Observing whether consumers are shifting toward less-exposed goods can help validate the NBER/CEPR finding of partial relative pass-through.
The upcoming renewal of the US-China trade truce is the most immediate catalyst. If the truce is not renewed and tariffs are reinstated or increased, the timeframe of the response will be a combination of the rapid direct effect and the delayed indirect effect, meaning the full weight of the tariff may not be felt by the consumer for nearly a year.
Sources: nber.org, libertystreeteconomics.newyorkfed.org, federalreserve.gov, cfr.org.