Why Americans Are About To Experience Sharply Higher Prices

A few weeks ago, SocGen asked what is arguably the most important question relating to the global trade wars: are tariffs inflationary or deflationary? While there were various nuances, its conclusion was simple: "Inflationary short term, disinflationary medium term."

It appears that the "short-term" part has now arrived, because after several rounds of tit-for-tat tariffs and retaliations between the US and China, American consumers are about to be hit with sharply higher prices as tariffs on industrial metals put pressure on U.S. manufacturers.

In May, President Trump imposed steel and aluminum tariffs on the EU, Canada, and Mexico to help preserve America’s manufacturing base. The response: steel and aluminum prices have risen 33% and 11% respectively since the beginning of the year, as manufacturers began to price in the tariffs.

Moreover, tariffs on additional imported products from China have added even more costs for producers, which are now being aggressively passed through to the consumer.

"You’re going to see higher prices passed on to consumers…almost immediately" Matt Gold, a former deputy assistant U.S. Trade Representative for North America under former President Barack Obama, told CNBC. "A lot of goods are already warehoused that were imported months ago, so it takes a bit of time to catch up, but prices catch up pretty fast," he added.

"The way it works is that a U.S. importer pays the taxes to the customs duties or customs tariffs to the U.S. Treasury," Gold explained. "Of course, that’s going to effect the sale price [and] whatever price at which the exporter sells to the importer is going to lower, because the importer has to pay duties in addition to paying the purchase price."

Gold added that for American consumers, those soaring costs would be spread "really across the board. With Chinese retaliatory tariffs, we’ve imposed those on $34 billion of different goods coming from China. It’s a very broad array of consumer products, industrial products."

“So everything from the person who walks into Walmart is going to pay higher prices as well as the manufacturer buying material imports for their manufacturing processes,” the former official added.

To be sure, the latest Markit PMI already warned about the threat of sharply higher prices, noting that "July saw the steepest rise in prices charged for goods and services yet recorded by the surveys as firms passed rising costs on to customers, in turn frequently linked to tariffs."

And here's why.

This month, Winnebago Industries warned that the recreational-vehicle boom seen in the last several years could have popped: "We’ve had to go to the market a bit more frequently and a bit more aggressively with some price increases as of late,” said Michael Happe, chief executive of recreational-vehicle manufacturer Winnebago Industries Inc, who spoke with The Wall Street Journal.

Happe did not disclose how much the tariffs would affect prices but said the company had made changes such as altering recreational-vehicle floor plans to decrease costs.

The CEO of the Iowa-based company said that it has benefited from the recent recreational-vehicle boom. However, trade tensions and rising inflation could lead to a gloomy outlook for the company. "Uncertainty is never a great thing for the economy and the more noise there is there’s a risk that consumers will press pause," he said.

Polaris Industries is another recreational-vehicle company raising prices on its vehicles including boats, motorcycles, snowmobiles to cover $15 million of the $40 million in tariff-related charges to pay for steel, aluminum, and components from China this year. The company is facing severe headwinds from retaliatory tariffs from other countries on products it exports from the U.S., including the Indian-brand motorcycles it ships to Europe.

In a move that is sure to infuriate President Trump, CEO Scott Wine said he could soon move production facilities of road bikes that it sells in Europe to Poland from Iowa to avoid European Union tariffs.

Last month, Harley-Davidson announced similar plans in June to move production to Europe, which drew substantial criticism from labor unions and the wrath of President Trump. Harley’s CEO Matt Levatich said last month that the transition would help keep costs down for its motorcycles in Europe and escape Trump’s tariffs. “We made the best decision given the circumstances,” he said last week.

His decision will soon be copied by dozens of other US manufacturers who face the challenge of keeping profits high amid sharply higher costs.

And while tariff costs for recreational-vehicles are slowly but surely being passed along to the American consumer, at least these are highly discretionary purchases for members of society's upper-middle and top income class, and as such the hit to their wallet will be manageable. 

But what's worse is that far more Americans are about to suffer rising prices on their purchases of key staples. Last week, Coca-Cola CEO James Quincey said tariffs are going to inflate drink prices. “Clearly it’s disruptive for us. It’s disruptive for our customers,” Quincey said. He believes distributors and retailers will pass along increased prices to consumers in the third quarter.

Coca-Cola it raising soda prices because of rising costs, including freight rates as well as prices for plastic and aluminum. Photo: AP

Beverage inflation is not just coming to soda, executives at Sam Adams brewer Boston Beer warned their prices could move up 2 percent this year.

“At some point, increased commodity costs have to be passed through to some extent,” Chief Executive Jim Koch said in a recent earnings call.

And it appears that that time is now.

Industrial manufacturer Lennox International has also dramatically increased prices of its heating, ventilation, air conditioning, and refrigeration products because of the tariffs. The company has raised prices twice this year to cover an additional $50 million on steel. Lennox said it expects to pay $20 million more for freight and $5 million for tariffs on components from China this year.

“We haven’t seen any pushback on the price,” Lennox CEO Todd Bluedorn said on an investor call last week, although he probably should have added the word 'yet.' Bluedorn noted that he was not alone and all of his competitors have announced similar price increases.

The list goes on.

Office furniture producer Steelcase also raised prices in June for the second time this year as base metal prices accelerated. “It’s been a long time, if ever, that we’ve done two price increases back to back as quickly as we did,” Chief Executive James P. Keane said.

Meanwhile, the agriculture industry and farmers, especially of soybeans, have been crushed by retaliatory tariffs. Last week, the USDA issued a proposed $12 billion bailout for U.S. farmers: the farmer subsidy would include direct payments to soybean, corn, wheat, cotton, dairy, and pork producers impacted by tariff retaliation.

So with the 2018 Midterm Elections in sight, President Trump’s trade wars are hurting potential republican voters right where it hurts the most: in the wallet, and the higher prices are spreading to increasingly more goods and services. As a result, consumers are forced to dip into their savings and spend on credit to survive as the prices of goods soar.

The lingering question ahead of the elections is whether Americans will vote with their empty wallets or continue the status quo. One answer came last week from Iowa farmers, who criticized President Donald Trump’s $12 billion farm aid package and worried about trade wars impacting their business, yet many still turned out to support him on Thursday during a visit to the top corn-producing state.

Trump may be taking on fights with too many trading partners at once, said Bob Weber, a corn farmer in nearby Bellevue, Iowa. But Weber still turned out to watch Trump, for whom he voted, land on Air Force One.

“What he’s doing is right but he might be doing too much at the same time,” Weber said.

Meanwhile, others suffering farmers continue to give Trump the benefit of the doubt:

BJ Reeg, a farmer in nearby Bellevue, worries that trade tensions have hurt prices for the soybeans he grows and meat he produces from cattle.

“This trade war thing, it has to be done,” Reeg said as he leaned on his silver pickup truck. “In the long run, it’s gonna be good, if a guy can hang on.”

Come November, the answer to how much longer "a guy can hang on" could mean all the difference for Trump and the GOP, especially now that billionaire industrialist and prominent Republican donor, Charles Koch, announced that he himself can barely "hang on" for much longer, and warned that the greater the level of trade restrictions, the greater the risk of severe economic fallout: "Every nation that’s prospered is one that didn’t engage in trade wars," he said. Just how Koch plans on making his policy displeasure known to Trump remains to be seen.

Comments

Dindu Nuffins AnngeloJamaica Sun, 07/29/2018 - 19:25 Permalink

Daily reminder:

Tariffs are provided for in the Constitution. They are a tax on the sale of goods that crosses the border of the country.

Income taxes are illegal and not intended by the Founding Fathers. They are a direct tax on earned private property. 

Income taxes were pushed through by the rich in 1913 to entrench themselves. (Rich do not get paychecks, but live off capital gains which are always taxed much lower. In fact, 4 decades passed after the income tax, before dividends from company ownership were even taxed, at all.)

In reply to by AnngeloJamaica

HockeyFool Dindu Nuffins Sun, 07/29/2018 - 19:41 Permalink

"rising prices on their purchases of key staples."

Fucking Coca cola is not a staple. Ag prices are going to drop, not rise. And I don't need an RV, an ATv, or a snow machine.

So where are the tariffs hitting the average consumer exactly? Beer? THAT is a staple, but a 2% increase? yawn.

Get real. This is another fucked up anti-Trump bullshit article.

In reply to by Dindu Nuffins

Last of the Mi… superyankee Mon, 07/30/2018 - 06:57 Permalink

The Fed has the same problem fb has. Market penetration. Once you control everything through 10 years of QE the real market economy is but a fraction of what it originally was. You won't find any statistics on that. Trillions is QE inflated the economy in a way that has yet to work itself throughout and down to the little guy on the street. Simple economics dictate the inflation will be massive. It's how they pay for QE, stupid. fb has completely penetrated the market, is, in fact nothing but a de facto monopoly deciding who can way what where and how the continues to run the meme of a capitalist society where markets are unlimited. It's just ain't so, my friend. Actually the same is true of Amazon. 

The only way to unlimited growth is if the Fed leaves the economy alone and lets it grow on it's own, not through the corporate welfare that is QE from the top down. That's NOT the Fed's job.  It's a fact, Jack. It was a really really bad idea and our economy is probably changed forever because of it. 

In reply to by superyankee

HungryPorkChop Last of the Mi… Mon, 07/30/2018 - 09:55 Permalink

What happened in Brazil during the 1990's when they had high tariffs on imports is the local manufacturers raised their prices significantly and placed them just under the imported goods.  So if a Maytag Washing Machine was $1,000 the local Brazil company would get a similar name like MayoTug Washing Machine and price it at $900.  Usually the local products were junk!  Same thing happened with tennis shoes, clothes, TV's, computers, cars, etc.  I expect the same to happen here where all the local companies just raise their prices so they're 10% under the imported goods..  This pushed a lot of people into poverty and the only winners were the government taking in all those tariffs and the local manufacturing companies that made huge profits copying imported goods then making within the country.  Also, it created a huge black market for imported goods where everyone returning internationally had their suitcases loaded with Nike and Reebok shoes, name brand clothes plus Sony DVD players.  

So I expect prices to rise significantly even without inflation factored into the equation. 

In reply to by Last of the Mi…

Ayreos HungryPorkChop Mon, 07/30/2018 - 11:09 Permalink

Your argument just proves tariffs work. The local manufacturers got sales and jobs. Blaming the poverty of a banana republic like Brazil on tariffs alone is way too easy. You place tariffs to price out unfair trade advantages (like another country's widespread slave labor,) otherwise your own countrymen will have to compete with slaves, with obvious wage drops that are just made worse by any attempt to increase them artificially, since the other country becomes even more efficient, producing more with less. A high tech country wants high price of labor for high wages, and high tech exports that other countries cannot easily copy. Letting China steal the technology and produce high tech exports AND low tech exports with slave labor is the horrible mistake Trump is fixing, god bless him. Once China's cheap labor is priced out they will be forced to either equate the trade balance (unlikely) or drop trying to compete with high tech manufacturing (since the american companies would see more advantage in manufacturing locally once the labor price advantage is lost in China, leaving together with their tech.) This means tariffs on agriculture and steel will have to go, but only when the US has taken its market back. Trump is a savior and the widespread incompetence of the public and the pundits is just another difficulty he has to cross. In my opinion, the US is beyond saving because of its ruined culture, but i'm not american.

In reply to by HungryPorkChop

HungryPorkChop Ayreos Mon, 07/30/2018 - 13:30 Permalink

We're discussing sharply rising prices and not whether Brazil is a banana republic.  I'm just telling you what is going to happen as I've already seen it before when a country raises tariffs.  Long term I hope it's good for the U.S. but I'll hold my breath until then. 

Basically I see the large international companies looking for more loopholes like the Bahamas to import goods.  They've already been using Canada and Mexico to import goods then NAFTA to get around a lot of tariffs bring everything into the U.S.  There's a lot of loopholes to close. 

In reply to by Ayreos

Ckierst1 Last of the Mi… Mon, 07/30/2018 - 10:36 Permalink

We won't get a level playing field until we restore laissez faire free enterprise.  Governments perpetuate monopolies and TBTF.  Kill the Fed and the Income Tax.  They don't need it anyway the way they create credits.  The ink was hardly dry on the Constitution before the in crowd was plugging protective tariffs for cronies instead of revenue tariffs to fund gummint.  Next stop was sectional strife, the Tariff of Abomination, secession and blood letting on a grand scale.  The predators won so we live with the consequences and enablers to this day!  Time for an economic reset.  Resist crony corporatist mercantilism!  Laissez faire is liberty in economics.

In reply to by Last of the Mi…

shovelhead Stuck on Zero Mon, 07/30/2018 - 07:46 Permalink

If you saw the mutations in farmed salmon and in other fish you wouldn't eat any at all.

They're considered the most toxic food on the planet. All those Norwegian salmon are farm raised in a toxic soup of pesticides and antibiotics. 

https://www.youtube.com/watch?v=RYYf8cLUV5E

I shut down my healthy small hydroponic fish farm because I had a full freezer and couldn't give away or sell enough fish to keep up up the levels of nutrients for the veggie beds. Downscaling from small to tiny just isn't economic and upscaling to commercial levels is too much of a gamble with the costs involved from the State hoops you have to jump through without solid sales contracts. The County Extension agent told me just to process the fish and veggies for commercial sale would cost a minimum of $25-30K for NSF certified equipment and clean-rooms and that's in an existing building.

You don't need antibiotics and pesticides in clean water that is always replenished and the waste is extracted regularly and automatically.

If you stood in a cesspool all your life, you might have a few health problems too.

In reply to by Stuck on Zero

Endgame Napoleon Son of Loki Sun, 07/29/2018 - 21:36 Permalink

Don’t worry.

The Universal Basic Income will never come to fruition. It is like the universal-health-insurance theme that the Democratic Party threw out there for decades, finally passing something that helped the same people who benefit from their other means-tested welfare programs, while hurting  people who lose out in their unfair-to-the-max social-engineering projects.

Dems will use the UBI as a campaign tactic to string along the voters who get the short end of the policies that they actually pass. We already have a UBI for some, namely for womb-productive citizens & noncitizens, and it will stay intact, with occasional additions by Democrats that pay citizen and noncitizen parents even more for sex and reproduction.

Republicans won’t add or subtract from any of this, as it helps to drive down wages for US citizens living on earned-only income.

Their campaign donors like this.

Democrats and Republicans in the Uniparty subsidize the major household bills—rent, groceries, electricity, etc.—of single moms & womb-productive legal / illegal immigrants in single-breadwinner households with US-born instant-citizen kids when they stay under the income limits for the programs by working part time.

It drives wages and hours down for all of the single, childless citizens and the single parents with kids over 18 who live on earned-only income, facing rent that consumes more than half of their monthly pay. Due to welfare, womb-productive citizens & noncitizens do not need wages sufficient to cover household bills. They can afford to accept low wages and part-time hours. 

Win for cheapskate employers...

Win for womb-productive citizens & noncitizens...

Lose for single citizens who need for earned income ONLY to cover all household bills...

The solution of Uniparty politicians is to give the same group of citizen & noncitizen welfare recipients monthly cash assistance in the hundreds and up to $6,431 in refundable child-tax-credit money to spend as they please. 

The universal-health-care and Universal-Basic-Income themes are to the Democrats as abortion and immigration are to the Republicans. 

The parties use these issues to turn out their respective bases without really doing anything about the issues. When Uniparty politicians actually pass legislation, they add on freebies to the broad array of existing freebies for select groups of voters—the exact same groups every time, primarily womb producers. 

After seizing power in 2016, the first thing Republicans did was to pass a tax cut for the rich. To take the edge off of the issue of tax cuts for the rich at a time of massive income disparities, Republicans added non-refundable child tax credits of $2,000 for dual-earner parents—i.e. for people keeping two jobs with benefits made possible by a $260-billion tax exclusion for their employers under one roof, while $9-per-hour NannyCam-surveilled babysitters, $9-per-hour daycare workers or elderly grandparents do the work of raising their kids for them. 

This is the same group that Obama’s stimulus provided with a couple of thousand, albeit Obama also bumped up the refundable child tax credit for citizens and noncitizens to above $8,000 for maximum womb productivity. 

Per-capita income in many states is $20k or below, leaving single, childless citizens and single parents with kids over 18 in the impossible situation of financing unaffordable rent and all other bills on yearly wages that are just double the amount of the max refundable child tax credit in the Obama stimulus. Those refundable child tax credits for part-time-working welfare consumers who do not pay income tax finance a lot of beach trips to copulate with boyfriends and tattoos since those moms lack the expense of rent & groceries due to monthly welfare, whereas the non-refundable child tax credits finance kitchen redos and trips to Europe.

Whether you stand in line to vote for the Democratic or the Republican half of the Uniparty, the thing that is most likely to come to fruition is not the UBI or an immigration bill that reduces competition from welfare-buttressed immigrants in the labor market.

The thing that Uniparty Democrats OR Uniparty Republicans are likely to pass is paid family leave so that above-firing parents with welfare-paid bills, and above-firing parents in dual-earner households, who already enjoy an enormous amount of excused time off in their “voted-best-for-moms” and family-friendly jobs get more large stretches of time off from work, but with pay, bumping up their compensation even higher above the compensation of single-earner and childless employees who do not enjoy wages boosted by monthly welfare, the progressive tax code or paid leave related to their personal-life choices.  

 

In reply to by Son of Loki