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When Donald Trump took office last January, most economists feared what would happen if he raised tariffs. The expectation was that, as the new duties drove up prices of consumer goods and inputs – affecting households and companies, respectively – surging inflation and falling real incomes would follow. This would be a supply shock, so the US Federal Reserve could not do much to counteract it.
Trump did raise tariffs to shocking levels, violating international agreements and blowing up the Republican party’s oft-professed commitment to free trade. In terms of severity and disruptiveness, Trump’s 2025 tariffs went far beyond the already harmful tariffs of his first term, and even beyond the infamous Smoot-Hawley Act of 1930. According to the Yale Budget Lab, the average effective tariff on US imports rose from 2% to 18%, the highest level since the 1930s, this year. Add to that the uncertainty caused by frequent and inexplicable policy changes, and large adverse effects on inflation, employment and real incomes appeared all but inevitable.
But things did not turn out as anticipated. It is possible that consumer price inflation (CPI) did not rise at all: the most recently reported rate, for the 12 months ending in November, is 2.7% – the same level as in the closing months of 2024. (Of course, the price level is higher, contrary to Trump’s claims.) The unemployment rate rose only a little, from 4.1% at the end of 2024 to 4.6% in November. Economic growth probably slowed toward the end of the year, but the situation remains unclear, because a US government shutdown delayed data collection.
In any case, it is pretty safe to say that the economic damage caused during Trump’s first year back in office has been smaller than predicted. There are four reasons why his tariffs’ biggest effects were limited or delayed in 2025.
First, US economic statistics are unusually vulnerable to measurement problems, owing to the government shutdown, which stretched from 1 October to 12 November. Some CPI information is missing because the Bureau of Labor Statistics could not collect data as usual, particularly for October. Even in November, there is reason to doubt that housing cost inflation amounted to zero, as reported. If true, this would bias the overall CPI estimate downward. GDP releases by the Bureau of Economic Analysis are way behind schedule, with the release of third-quarter GDP data having been postponed.
The second reason we have seen less damage from Trump’s tariffs than expected is that many of the highest ones are not fully in effect. Trump has postponed some tariffs repeatedly. He rolled back others on 14 November, because they were driving up grocery prices.
Moreover, Trump introduced major tariff exceptions for some countries. For example, the integrated North American auto industry would have been devastated if he hadn’t decided on 6 March to exempt goods from Mexico and Canada from the 25% levy that had gone into effect two days earlier. Goods from these countries now face no penalty if they are imported under the US-Mexico-Canada agreement.
This softening was predictable. US business would have suffered enormously if Trump had fully implemented the tariffs he had announced, let alone threatened, so it was never likely that he would persist with the worst of them. Trump regularly stakes out extreme negotiating positions, only to back down when the heat is on, even if he hasn’t gotten what he demanded from the other side. In fact, investors’ assumption that “Trump always chickens out” – known as Taco – has become a taunt. But when a madman threatens Armageddon, it is foolhardy to goad him into following through. The tariffs Trump has implemented are still very high.
But this does not mean economists got their predictions all wrong. There are good reasons to think that many of the adverse effects of Trump’s tariffs have simply been delayed, and we should expect them to show up in 2026.
This brings us to the third point: as soon as Trump was elected in November 2024, companies began front-loading imports, in order to accumulate stocks of goods – especially gold from Switzerland and weight-loss drugs from Ireland – before the anticipated tariffs were introduced. The Penn Wharton Budget Model estimates that this strategy saved US importers as much as $6.5bn (£4.8bn) – equivalent to 13.1% of the new tariff bill – through May 2025.
After the tariffs entered into effect, most retailers still didn’t raise prices, as they had not depleted their pre-tariff inventories. This is common practice among retailers, though an economist might say that it violates the principle of profit maximisation. Even today, many importers have still not fully passed along the added costs to their customers.
In fact – and this is the final and most important point – importers have continued to absorb much of the cost increase, even after depleting their pre-tariff inventories. Using real-time data from large US retailers, Alberto Cavallo and his co-authors find that the prices of goods subject to the new tariffs – the imported products and their US-made substitutes – have been rising since April. The increase, which amounted to about 5.4% at the retail level, has been enough to raise the inflation rate on the overall CPI basket by 0.7 percentage points above where it otherwise would have been. But it represents a small fraction of the costs that could potentially be passed through, at current tariff levels.
To be sure, the prices importers pay have risen proportionately with tariffs, contrary to Trump’s claims that foreign exporters cover the costs of the duties by lowering their prices. It is US companies that have been absorbing the costs, much as they typically do when the dollar depreciates. This partly reflects the fact that they have no idea how long the tariffs will be in place. Trump might change his mind, or perhaps the supreme court will decide to adhere to the law and strike them down. This uncertainty also helps to explain why many affected companies have so far refrained from laying off workers.
But companies will not let tariffs erode their profit margins indefinitely. Assuming the tariffs remain, the US can look forward to more price increases, and downward pressure on real incomes, in 2026.
Jeffrey Frankel is a professor of capital formation and growth at Harvard University. He served as a member of President Bill Clinton’s Council of Economic Advisers.
