The U.S. economy staved off soaring inflation because companies ordered huge quantities of product in anticipation of tariffs and subsequent price increases. Now, as those inventories wind down, those same companies forced to order tariffed products. Among the most telling categories are basic consumer goods and cars.
At the start of the year, companies built up their inventories to make sure they had ordered goods before Trump’s tariff plan took effect, which would cause import prices to shoot up. Those stockpiles had also helped keep price hikes for consumers at bay. But now, three months on from the first tariff announcements in April, reserves are dwindling. Companies need new products, and costs have risen.
The same companies that had successfully delayed having to pay tariffs now have no choice but to restock their inventories at higher prices. That prices will rise for importers is virtually a guarantee, although White House officials have at times maintained the entirety of the costs of tariffs will be borne by exporters.
Whether prices go up for consumers, and by how much, will determine much of the impact of tariffs. That leaves economists trying to answer these questions and divine what lies ahead for the U.S.
“Everybody was front running tariffs. They were basically buying things at a discount to their future cost,” said Dryden Pence, chief investment officer of Pence Capital Management.
Once those inventories are fully gone, the U.S. economy will be in a true tariff environment. Companies will no longer be able to use their previous stockpiles as a crutch to avoid making crunch-time decisions. They will have to pass through costs to consumers, or see their margins fall. For the Federal Reserve, it will mean a view of tariff’s true impacts. If companies raise prices, spurring inflation, then a rate cut is less likely. If companies cut costs elsewhere, notably through layoffs, then unemployment could spike, making a rate cut a necessity.
Among the categories that could serve as an initial bellwether about the specifics of inflation are basic consumer goods—clothes, toys, furniture—and cars, due to the sheer number of imported parts needed to construct them.
Earlier this week, the Bureau of Labor Statistics released its June inflation report. Prices rose 2.7% over the last 12 months, in line with expectations. Underneath the headline number, though, there were a few categories that saw the sort of sharp increase that might spell the dwindling pretariff inventories. Consumer categories like apparel and home furnishings, which includes things like furniture and domestic services, rose 0.4% and 1.0%, respectively.
In a note published Tuesday, Deutsche Bank said those numbers were ”clear evidence of tariff passthrough into core goods data.”
The prospect of more expensive clothes and other everyday goods could signal that companies, which make the exact sort of products that get shipped from overseas, can no longer rely on the cheaper versions they’d frontloaded at the start of the year.
Those inventories will be depleted in about one to two months, estimates Jake Schurmeier, a portfolio manager at Harbor Capital, who previously worked at the Federal Reserve Bank of New York. “I do think by and large, companies will start to be cutting through a lot of that inventory,” he said.
Dryden, though, sees these basic goods—like clothes or toys—as having more fungible supply chains that makes it easier for them to move manufacturing from a high-tariffed country to one that faces lower duties. T-shirts or action figures can be set up in new countries with lower tariffs, making them less helpful predictors of inflation’s eventual levels and permanence, he argued.
“The less capital intensive you are, the easier it is for you to move,” Pence said.
Instead, he recommends looking at import prices for component parts of finished goods. Automobile parts are the “biggest glowing factor” in assessing the ultimate levels of inflation because cars have complex supply chains that source many different pieces, according to Pence.
“You have to take a look at what percentage of their finished products are made up of components that are subject to tariffs,” he said.
Dryden added he forecasts car prices will rise in the third and fourth quarter of this year.
In the recent June inflation report, car prices actually fell 0.3% compared to the year before. In recent months, car companies have been navigating a delicate balancing act as demand wavers, making price hikes harder, while at the same time costs are set to rise.
This story was originally featured on Fortune.com
