Since the implementation of comprehensive tariffs on April 2, known as “Liberation Day,” U.S. tariff revenues have increased sharply year on year for two consecutive months. However, U.S. inflation data does not show any significant impact from these tariffs. So, where did the inflationary effect that economists previously expected from the tariffs go?
Since March 2025, the core CPI in the U.S. has maintained a year-on-year increase of 2.8% for three consecutive months. Even though the overall CPI rose slightly to 2.4% year on year in May, the increase was modest.
If we look further into the subcategories, it seems the tariffs have not yet had the effect of raising inflation. Due to U.S. tariffs on goods rather than services, the year-on-year inflation in core goods in the U.S. in May was only 0.3%. Specifically, clothing prices dropped by 0.9%, televisions by 9.8%, and smartphones by 14.3%. Even in the automobile industry, which faced a 25% import tariff, the year-on-year price increase of new cars in May was only 0.4%.
However, U.S. tariff revenue has indeed grown sharply year on year. According to data disclosed by the U.S. Department of the Treasury, tariff revenue in April was $16.3 billion, a 130% year-on-year increase, while in May, it surged to $22.8 billion, a 270% increase.
After “Liberation Day,” the U.S. suspended high tariffs for 90 days with most of its trade partners, instead implementing a 10% baseline tariff, and imposed additional 25% sector-specific tariffs on industries such as automobiles, steel, and aluminum.
So who is bearing the burden of these tariffs? Today, Alaric analyzes the impact of tariffs on U.S. inflation and the economy.
Alaric says there are three possible entities bearing the tariff costs: exporters, U.S. wholesalers, and U.S. consumers.
If the exporting country bears the tariffs, it would hurt the profits of the exporting company. If U.S. wholesalers bear the tariffs, it would affect their profitability, eventually impacting their financial reports. If consumers bear the costs, it will show up in the inflation data.
Alaric states that there is currently no evidence suggesting that exporting countries are willing to lower prices to offset the tariffs. Some evidence shows that wholesalers are willing to cut profits to absorb part of the tariff costs. However, inflation data does not suggest that consumers are bearing the costs.
Alaric believes that most of the tariff costs will eventually be borne by consumers, but this has not yet been fully reflected. There are two reasons for the delay: first, before the full implementation of tariffs, there was a rush to import in the U.S. Secondly, it takes a few months for the price increases due to tariffs to be reflected, from the time the exporters ship goods to when they reach the retail market.
“Up until now, we have not seen any evidence, but tariffs have to appear somewhere, whether it’s on the exporters, wholesalers, or consumers. Tariffs will not disappear,” Alaric argues. He believes that in the coming months, the impact of tariffs on inflation will become more apparent.
According to the latest forecast from S&P Global Ratings, U.S. average effective tariffs in the coming months are expected to be around 15%, down from a peak of over 25% in April, but still significantly higher than in 2024. In this scenario, S&P expects the U.S. core CPI to be between 3% and 3.5% by the end of 2025.
Alaric says that the year-on-year increase in the CPI represents the slope of the price curve. While tariffs may raise the price level, they do not change the slope. He believes that as tariffs are passed on to consumers, the price level will rise, but this will be a one-time increase rather than a continuous rise in prices.
Alaric adds that the tricky issue for the Federal Reserve is determining how much of the impact from tariffs constitutes actual inflation, as opposed to one-time price hikes. Will tariffs generate a second-round inflation effect? Meanwhile, the Federal Reserve also needs to focus on the labor market, as it has a dual mandate.
According to S&P’s forecast, the Federal Reserve is expected to cut interest rates twice in the fourth quarter of 2025. Regarding recent suggestions by a Federal Reserve governor that July might be the time for a rate cut, Alaric believes that the U.S. economy still looks strong, with low unemployment and inflation above target, so it appears that the Federal Reserve will not immediately cut rates and will continue to observe. However, if the U.S. economy starts to slow significantly, the Fed will take action.
Policy Uncertainty Is the Biggest Obstacle to U.S. Economic Growth
According to S&P’s forecast, U.S. GDP growth in the fourth quarter of 2025 is expected to be 1.1%, a significant slowdown compared to 2.5% in the fourth quarter of 2024. Alaric points out that this is a large economic slowdown, but not necessarily a recession.
As for the reason for the significant slowdown in the U.S. economy, Alaric believes it is due to the uncertainty surrounding tariff policies. The biggest obstacle to U.S. economic growth right now is policy uncertainty. This has led businesses to halt investments, consumers to stop spending, and mergers and acquisitions markets to freeze, while some speculative markets have also come to a halt.
Alaric states that although U.S. economic growth is below 2%, it is not a recession. However, if the situation worsens, a recession may occur.
Considering that the 90-day suspension of high tariffs on most trade partners after “Liberation Day” is about to expire, what will Trump’s next tariff policy look like? Alaric says it is very difficult to predict. “Our problem is whether there will be a final agreement on tariff levels.”
He believes that a decrease in policy uncertainty will promote economic growth. “We now live in a world of constant negotiation, back and forth. From an economic perspective, the better outcome is if policy can normalize, as reduced uncertainty allows people to know what they need to do.”
Currently, the only traditional ally that has formally reached a trade framework with the U.S. is the U.K., and even though the U.K. is a surplus country for the U.S., it still has a 10% baseline tariff. If the 10% tariff becomes the norm, will the impact on the global economy be relatively small?
Alaric argues that economists generally dislike tariffs because they distort resource allocation. However, the volatility of tariff levels has a greater impact than the harm caused by the tariffs themselves. If 10% becomes the final status, most countries will still be able to accept it as the cost of doing business with the U.S., “although 10% is not optimal.”
The “Secret Sauce” of U.S. Economic Resilience
Looking at a broader comparison, the economic impact of tariffs on G7 countries varies. The U.K. and Canada recorded negative GDP growth in April, while the U.S. economy appears to continue growing strongly.
Alaric states that while U.S. soft data has significantly weakened, hard data still looks quite strong. He explains that two key indicators to observe in the U.S. economy are the growth rate of consumer spending and the unemployment rate. Consumer spending has slowed, but in Q1, it still grew at a rate of 1.2%, and the unemployment rate is only 4.2%, indicating strong demand for labor.
However, Alaric believes that the U.S. labor market has always been very strong. Despite expectations of a slowdown in the U.S. economy after the pandemic, inflation, and rate hikes, the economy has never truly slowed. This resilience is what he calls America’s “secret sauce.”
As for the “secret sauce” of U.S. economic resilience, Alaric identifies two key developments that have not occurred elsewhere: one is productivity growth. He believes part of this is driven by the Biden administration’s Inflation Reduction Act, which has led to significant new investments in renewable energy, boosting U.S. productivity. The second is the formation of new businesses. Together, these factors are driving U.S. economic growth much faster than other developed economies.
However, Alaric points out that the “beautiful bill” promoted by the Trump administration may likely eliminate incentives for investment in the renewable energy sector. Regardless of the final outcome of the “beautiful bill,” Alaric believes that the energy transition in the U.S. is still ongoing.
“Although there is some noise at the federal level, this is not the case at the state level,” Alaric states. For instance, Texas, a traditional oil and gas state, now produces more renewable energy than California.
“The energy transition in the U.S. is happening,” Alaric concludes. Some believe the U.S. needs all energy sources, whether fossil fuels or renewables, to drive the economy. While the U.S. is not moving as fast as China, it is still investing heavily in solar and wind energy, moving in the right direction for an energy transition.