For every percentage point that average tariffs rise, consumer goods prices climb by about a quarter of a percent after one year, according to new research from the Federal Reserve Bank of New York published this week. The study examined the 2025-26 tariffs and found that roughly two-thirds of the price increase comes directly from higher costs on imported consumer goods, while the remaining third arises indirectly as U.S. manufacturers pay more for imported parts and raise their markups when competing imports become pricier. The timing differs sharply: import prices respond almost immediately to tariffs, while prices of domestically made goods adjust over six to twelve months as elevated costs work through supply chains.
The researchers found that import prices rose nearly one-for-one with tariffs, with about 90 percent of the 2025 tariffs passing through to U.S. import prices in the first month after a tariff increase. By February 2026, tariffs had added 2.9 percentage points to goods price inflation, and without them goods prices would have declined slightly, the study shows. The tariff effect on consumer goods price levels peaked near 3 percent in February 2026, according to the report. A 10 percent jump in import and producer prices caused by tariffs lifts retail consumer prices by 5.6 percent, the researchers calculated. About half of what consumers pay for goods covers distribution costs like transportation, wholesaling, and retailing, which helps explain why tariff-induced increases at the factory gate or border don't fully translate to retail shelves.
The authors found evidence that U.S. producers increased their prices through two distinct mechanisms. The marginal cost channel—where tariffs on imported parts and materials raise production expenses—proved larger than the strategic complementarity channel, where domestic producers face less competitive pressure to keep prices down when imports become more expensive. "The direct effect of higher import prices comes through quickly: about half is in place after three months and all of it by six months, as retailers take a few months to pass on higher costs," the report states. In contrast, the indirect tariff effects from elevated domestic producer prices take longer to materialize, with the size of the indirect effect on retail prices more than doubling between six and twelve months.
The study forecasts that the tariff effect on goods price inflation will fall to around zero by August 2026, then turn negative as the large tariff increases of 2025 drop out of the twelve-month comparison, before edging slightly positive again by mid-2027 as Canadian tariffs pass through. The forecast assumes tariffs stay at their end-of-September 2026 levels, except for the announced January 2027 tariff increase on Canadian cars, trucks, and auto parts. An easing in the tariff effect on the goods price level to about 2 percent by August 2026 reflects a tariff cut in early 2026, when a Supreme Court ruling ended tariffs imposed under emergency powers and a lower 10 percent surcharge replaced them. The report emphasizes that while the contribution of tariffs to inflation is fading, consumer goods price levels remain elevated—the full effect of a tariff takes about a year to appear, and importantly, tariffs also raise the prices of goods that aren't directly taxed.