The economics of who pays for US tariffs is largely settled, even if the politics is not. Most of the cost has been borne by American businesses and consumers, new Federal Reserve research shows. The more important question is what happens as the delayed effects of the levies feed through the US economy.
A New York Fed study released on February 13 showed that some 90 per cent of last year’s tariff costs were absorbed domestically – not, as President Donald Trump has argued, paid by foreign exporters. The Tax Foundation, a think tank, says this has already cost the average US household $1,000 in 2025. The sum will rise this year.
The bigger risk for the US economy is not the initial tariff shock. It is the second-round impacts of higher inflation, a weaker dollar and mounting pressure on policymakers that could see tougher regulation imposed on consumer-facing companies, the ones hiking prices. That will play out in the next 12 months.
Boardrooms are not waiting around, with many now bracing for higher input costs, tighter margins and greater policy uncertainty. For executives, the challenge is managing sustained cost pressure and policy risk, particularly around currency exposure.
Warning signs
The fallout from 2025’s policy moves are becoming a growing operating risk for US companies. Retail giant Walmart cautioned that margins are coming under pressure as older inventory is replaced with higher-cost, post-tariff goods. Roughly a third of its US merchandise is imported.
That pattern is unlikely to be limited to retailers. As cheaper inventory runs out, price pressures are expected to spread. This could mean that 2026 is far tougher than 2025 for US companies, due to the fading of the “inventory illusion”, or the lag between levies being rolled out and higher import costs feeding into prices.
Last year, US companies rushed to stockpile goods ahead of the Trump administration’s tariffs coming into effect, with imports soaring at an annual rate of 41 per cent in the first quarter of 2025. That softened the initial blow but, as those inventories are replaced at higher cost, the buffer disappears.
Headline inflation eased to 2.4 per cent in January, but tariff effects typically feed through with a delay. Companies tend to raise prices gradually as inventories turn over. The Peterson Institute for International Economics estimates the lagging pass-through could add around half a percentage point to headline inflation by mid-2026.
If tariff-driven price pressures build and the Federal Reserve continues easing policy, the dollar is likely to weaken further. The US currency fell more than 9 per cent in 2025 and has slipped a further 1.2 per cent this year. Any further weakness would raise the dollar cost of imports, eroding the cost advantage of firms that source abroad.
Currency weakness would support exporters that source largely at home, improving price competitiveness abroad. But for those reliant on imported components, a softer dollar would erode much of that benefit by raising input costs.
Also, a weaker dollar would be felt beyond the US, particularly in Gulf economies whose currencies are pegged to it and whose interest rates track the Fed.
What can Americans do?
For American households already facing higher prices, the combined effect of tariffs and a weaker dollar would compound the cost-of-living squeeze. And if those costs stay high, then policymakers will face pressure to respond with populist measures.
Mr Trump's proposals to cap credit card fees have already been floated, and his administration has renewed efforts to rein in drug prices. But the overall signals on regulation coming out of the White House are mixed.
Mr Trump has talked tough on consumer prices ahead of this year’s midterm elections, while at the same time rolling back climate rules and moving to loosen oversight in parts of the financial sector.
In this environment, broad generalisations are unhelpful. Executives will need to assess risks case by case, which is likely to deepen divisions within the business community over the administration’s policies.
Consumer-facing companies will likely face closer scrutiny and respond by cutting costs where possible. As price increases become more politically sensitive, protecting margins will increasingly mean tighter cost control.
One traditional route to cutting costs – shifting more sourcing to lower-cost locations abroad – is likely to be politically constrained for high-profile US firms. Moves that imply American job losses will be taken only under severe financial pressure. Instead, many executives will look to automation and new technologies, including robotics, to narrow cost gaps at home.
The consequences of last year’s tariff increases are no longer political talking points. They are becoming operating realities. Inflation risk, a weaker dollar and regulatory pressure are converging. For US companies, the second phase of the tariff story may prove more demanding than the first.
