Less Dumb Investing

The U.S. is facing the highest tariffs in nearly a century, and yet inflation hasn’t spiked the way many expected. Economists have been puzzled, but the picture is starting to get clearer: the tariffs importers are actually paying are lower than the headline numbers suggest.

A recent analysis of census data shows that the effective tariff rate in May was about 9%, compared to the 12% figure often cited from White House announcements. The gap comes from two main factors: first, more than half of U.S. imports are still duty-free; and second, companies and consumers have shifted purchases away from countries facing the steepest tariffs, especially China.

This explains why inflation hasn’t taken off despite all the headlines about tariff hikes. In fact, many importers have quietly adjusted their supply chains, sourcing from lower-tariff countries or domestic producers. As a result, the effective burden has been less than expected.

That doesn’t mean tariffs aren’t having an impact. Between January and June, the government collected nearly $60 billion in tariff revenue. Prices on certain goods—like furniture and cars—are creeping higher, and wholesale inflation in July rose at the fastest pace in three years. But overall, the impact has been more muted than feared.

Part of the reason is exemptions. Pharmaceuticals, many electronics, semiconductors, and goods from Canada and Mexico have avoided the heaviest levies so far. There are also carve-outs for items with significant U.S. content. That cushion won’t last forever. Several exemptions are set to expire, and new tariffs as high as 250% on pharmaceuticals and 100% on semiconductors have already been floated. On top of that, the White House plans to eliminate the de minimis exemption, which currently allows shipments under $800 to enter duty-free.

Different researchers peg the real tariff rate anywhere between 10% and nearly 20%, but most agree on one thing: the effective rate is climbing, and much of the economic impact is still ahead.

For now, some companies are holding back on passing costs along, but that patience is fading. Importers who stocked up earlier in the year to beat tariffs are now running through their inventories. As those supplies dwindle, they’ll either have to pay the tariffs or cut back on imports, both of which eventually push prices higher.

We’re already seeing companies adjusting. Businesses that once absorbed the costs are starting to raise prices, sometimes by double digits, as they gain clarity on where tariffs will land. The strategy is shifting from “wait and see” to “pass it through.”

The bottom line: inflation has stayed surprisingly contained so far, but the effective tariff burden is rising. As exemptions close and companies run out of room to absorb costs, the true price impact will show up in the months ahead.