[NEW YORK] For all the worry about tariffs causing pain for American consumers, shoppers have so far been mostly shielded from – or shrugged off – higher prices at the checkout aisle.
Businesses absorbed much of the costs from new levies as they took effect last month, economic reports this week indicated. Profit margins at retailers and wholesalers shrank in April by the most in almost a year. Manufacturers signalled they are paying higher prices. Yet consumer inflation remained tame, and Walmart reported solid sales as it kept prices low.
But the world’s largest retailer also had a warning: Change is likely coming. Walmart said consumers will start to see higher prices soon as it works through inventory and begins to pass on the costs of newer merchandise.
“The price increases related to tariffs – we really haven’t seen yet,” chief financial officer John David Rainey said in an interview on Thursday (May 15). “These are happening right now, and they’ll become more obvious.”
Walmart also is closely watching competitors’ pricing, consumer reaction and ever-changing trade scenarios, he added.
On Friday, the latest reading of the University of Michigan sentiment index pointed to more fallout. It declined to the second-lowest level on record and inflation expectations climbed to multi-decade highs amid growing concerns about tariffs.
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Shifting company policies in part reflect broader turmoil over tariffs as the Trump administration negotiates deals and changes course. Steep new tariffs are on hold, for now, for many countries, while the US and China reached a temporary truce this week that will cut levies on the Asian nation to 30 per cent from 145 per cent for 90 days.
Economists and executives have said it’s not sustainable for businesses to keep absorbing costs. Still, it’s too early to gauge which items will get more expensive for consumers – and by how much or for how long.
“There are more questions than answers,” said David Silverman, a senior director at Fitch Ratings. Pricing decisions are “a delicate balance” of figuring out how much retailers want to take on themselves and what they want others to absorb, he said.
At the same time, Walmart’s commentary is expected to give other companies cover to discuss price increases more openly, Silverman said.
Walmart’s scale and supply chain makes it among the best-positioned retailers to weather volatility. Next week, big chains including Target and Home Depot are set to report their quarterly results, offering a greater window into the consumer outlook.
Even as shoppers have yet to see much of the tariff effect, US consumer sentiment has been slumping. The mere anticipation of levies adds to challenges such as lingering inflation and relatively high borrowing costs. That pessimism is starting to translate into weaker demand for non-essentials, with retail sales data out Thursday showing shoppers pulled back last month in several categories, including sporting goods and clothing.
The trade war also is starting to change the calculus for dealmaking in the retail sector. Earlier this month, 3G Capital agreed to take Skechers USA private for US$9.4 billion in a bid to help the shoemaker navigate the tariffs without the pressure of the public markets.
On Thursday, Dick’s Sporting Goods said it would buy Foot Locker for US$2.4 billion, affording the companies – both pummelled by tariffs given the Asia-made goods they sell – greater buying power and the ability to better negotiate with suppliers.
“More untenable”
The decision of when to pass on costs – and by how much – has been tricky for companies from giants like Walmart to small businesses such as Sanitube, a Florida-based firm that makes stainless steel tubing, valves and fittings for food manufacturers.
Todd Adams, Sanitube’s president, said he has held off on increasing prices of goods that came in before tariffs took effect. For items that arrived when duties were in place, he had to decide how much of the additional cost to pass along and how much to shoulder, at least temporarily, to remain competitive.
He’s now raising prices but doing so carefully, based on the timing of shipments and what his competitors are charging.
“We don’t want to shock our customers, and we have to be aware of what our competition is doing,” Adams said.
Sarah House, senior economist at Wells Fargo & Co, said she expects more costs to be passed on to consumers in the summer and into the fall as businesses’ pre-tariff inventories are depleted and companies become resigned to the fact that higher duties may be here to stay.
“Absorbing tariff costs through margins can be used to shield customers from price hikes for a time, but the longer the current policy stays in place, the more untenable that becomes,” she said.
Walmart, a bellwether for the economy, has said that it views the volatile environment as an opportunity to gain market share and that it would keep prices low to do so. But executives said this week that they wouldn’t hold the line at the expense of profit growth.
Rainey, Walmart’s financial chief, said shopper demand has remained stable, rebounding after a short period of pullback due to soft sentiment. That could be in part because tariff-fuelled price hikes haven’t broadly hit store shelves yet – though they are starting to now, he said.
“We’re hopeful that further progress will continue to be made because prices are still high,” Rainey said of tariff talks, adding that it will be “very tough” on the consumer to purchase some goods that come with extra duties on top of current prices.
Walmart said it intends to keep prices for groceries – which represent about 60 per cent of its total sales – low, though it pointed to emerging areas of pressure: bananas, avocados, coffee and roses. With other products, the retailer will spread higher costs across a category or department instead of raising prices.
And price hikes won’t be straight math. Some discretionary items, such as patio furniture, will have high levies, but consumers are unlikely to bear all of the tariff burden themselves.
At Atlanta-based Haverty Furniture, price increases have been minimal and targeted, president and CEO Steven Burdette said earlier this month.
“There will be price increases that will go into effect basically immediately, and then we’ll kind of monitor that as we go forward,” Burdette said on an earnings call. “Our suppliers have worked with us. And if the tariffs stay where they are right now, I really don’t see much impact to the consumer.”
As Trump’s trade policy evolves, investors and economists will closely monitor whether price increases are temporary or if tariffs will lead to a permanent reshaping of consumer costs, said Christian Greiner, senior portfolio manager at F/m Investments.
“The question is, is this a chapter or is this a book?” Greiner said. BLOOMBERG
