Federal Reserve's latest research: Lessons from history show that the transmission of tariffs to consumer goods prices is completed within 2 months

The latest research from the Federal Reserve found that real-time tariff effects are pinching consumers' wallets, with a projected 0.1% increase in core inflation by 2025.

On May 9, the Federal Reserve released a report that studied a method for real-time detection of the impact of tariffs on consumer prices, confirming that changes in tariffs quickly and directly transmit to price levels. The research found that the tariff changes in 2018-19 fully transmitted to consumer goods prices within two months, and the tariffs implemented in early 2025 have already led to a 0.33 percentage point increase in core PCE prices, pushing the overall core PCE up by 0.08 percentage points.

The study employed event study methodology to analyze the transmission of specific tariff events to consumer prices, as well as local projection methods to jointly analyze the transmission of multiple tariff events. Data sources included monthly PCE price data from the Bureau of Economic Analysis (BEA), input-output tables, and PCE bridging data, allowing the study to calculate both direct and indirect impacts of imports in each PCE category.

It is noteworthy that the report emphasizes that this analytical method only considers the impact of U.S. tariffs on other countries on consumer prices, without accounting for the effects of retaliatory tariffs or the potential impacts of tariffs on other outcomes (such as productivity and employment).

Analysis of the Impact of 2018-19 Tariffs on Prices

The new method developed by Federal Reserve researchers first constructs theoretical predictions of the impact of tariff changes on PCE (Personal Consumption Expenditures) prices, and then assesses the relationship between these predictions and the actual observed price changes.

The study conducted a retrospective analysis of the wave of tariffs implemented by the U.S. government in 2018-19, finding that the impact of tariffs on consumer prices was rapid and significant. The tariffs from 2018-19 fully transmitted to consumer prices within two months of implementation, with a transmission coefficient of approximately 1.75.

Taking the tariff event in May 2019 as an example (an additional 15% tariff on $180 billion worth of goods), the study found that PCE categories more affected by tariffs indeed experienced inflation exceeding typical levels. However, the report emphasized:

We found a significant upward slope relationship between the predicted tariff effects and excess inflation in these PCE (Personal Consumption Expenditures) categories, with a confidence level reaching 99%.

Notably, we also found evidence suggesting a negative intercept, indicating that PCE categories not significantly affected by tariff policies had inflation levels below typical values during the period from 2000 to 2017.

Therefore, although the tariffs imposed in May 2019 had a significant impact on the relative prices of different PCE categories, the effects were difficult to manifest in the overall data of core goods inflation due to other factors causing inflation levels to be below typical values.

Real-time Impact Assessment of Tariffs in 2025

Using the same method to analyze the tariffs implemented in February and early March 2025, the study found that tariffs have partially transmitted to consumer goods prices, with a transmission coefficient of 0.54, lower than the levels observed during the 2018-2019 period.

The report points out three main factors that explain why the price transmission coefficient is lower than the observations during the 2018-2019 tariff events:

• The primary factor is that the share of the exporting country in the total U.S. goods imports has significantly decreased, from about 18% in 2019 to over 13% in 2024;
• Secondly, the tariff policy was not implemented immediately. For example, although the first round of 10% tariffs took effect in early February, goods that departed before February 1 and arrived in the U.S. before March 7 were exempted—this means that goods already en route overseas would not be affected by import cost increases. Data indicates that the expected subsequent transmission effect of the tariffs on prices in February-March will further manifest in April.
• Thirdly, recent inflation has led to an increase in the frequency of price adjustments by companies. Compared to the 2018-2019 tariff events, the tariffs in 2025 may no longer play as significant a role in coordinating collective price increases among companies to absorb other cost increases that have not yet been reflected in prices.

According to the study's estimates, the tariffs at the beginning of 2025 have so far caused core PCE prices to rise by 0.33 percentage points, leading to an overall increase of 0.08 percentage points in core PCE.

The study concludes that without these tariffs, the core goods PCE inflation rate from January to March 2025 would be -0.18%, rather than the actual observed 0.15%