In a blog about inflation you might expect some reference to an obscure “law” of economics. I’m going to pivot and refer to an obscure law that doesn’t find its genesis in economic theory — Hofstader’s Law: “It always takes longer than you expect, even when you take into account Hofstader's Law.”
Normally, Hofstader’s Law is used in the context of information technology. The idea is that, because of the complexity of these projects, it’s very difficult to estimate how long they will take.
Assessing the impact of tariffs presents a similar challenge. There are so many moving parts (many of them dictated by human nature, which is notoriously difficult to predict) that you’re unlikely to get all your assumptions right.
What does this have to do with inflation?
When we model the impact of inflation, one of the things we assess is behavior of the parties involved in the process of importing a product. Many economists assumed the pass-through of prices would be efficient. Exporters wouldn’t change their prices much, importers would pay those prices and then pass a significant majority of those costs on to the consumer.
That’s not what’s happened. According to Goldman Sachs, it seems that roughly 22% of the cost has been passed on to the consumer. Exporters have picked up about 14%, and U.S. businesses have assumed the remaining 64%.
Small businesses are particularly vulnerable to the negative impacts of record-high tariffs. Learn more.
Are businesses likely to continue subsidizing the consumer in the face of higher costs? Very unlikely. Now that much of the uncertainty about tariffs is behind us, we should expect business as usual, which means that companies will seek to maintain their profitability — either by raising prices or reducing wages and employment. Many small businesses simply can’t afford to absorb the full cost of the tariffs on an ongoing basis.
Either way, the economy will be impacted — by higher prices, slowing growth or a combination of the two. As we watch the inflation numbers over the coming months, remember that even if we’re not seeing rapidly rising prices, they will be stalking us like the bad guy in a scary movie. They’ll eventually catch up. It’s just going to take longer than people originally expected.
