A 10% jump in the cost of purchases that represent less than 2% of GDP shouldn’t upend the US economy. Except that President Donald Trump is imposing this tariff “pain” on American consumers at a time of extraordinary sensitivity to price hikes.
Trump’s first tariff action was a new 10% tariff on all imports from China, which is a tax that American importers will pay to the US Treasury. China imports about $450 billion worth of stuff to the United States each year. If those imports stay the same, that would be $45 billion in additional costs borne by American purchasers. In a $29 trillion economy, that’s almost immeasurable.
But American shoppers are scrutinizing prices with unprecedented wariness.
A price sensitivity index maintained by research firm Morning Consult shows that reluctance to pay higher prices has hit a new high in data going back to 2022, when inflation hit a 40-year peak. Americans are no longer shocked by inflation, but the cumulative effect of higher prices is making them more likely to walk away than bite the bullet and make a purchase.
Trump ran for president in 2024 promising to bring prices down, and exit polls show that some voters clearly picked Trump over Democrat Kamala Harris because they trusted him more on the economy. His first month in office, however, is fueling concerns about reflation.
Consumer surveys by the University of Michigan and the Conference Board show that Americans expect inflation to get worse, not better, during the next 12 months, largely because of Trump’s tariff policies. The Federal Reserve stopped cutting interest rates in January while it waits to see if Trump reignites inflation, as many economists warn.
Some Wall Street analysts think Trump tariff threats are mostly bluffs, but if not, they say, markets haven’t priced in the full extent of the possible damage.
Trump is likely to keep everybody guessing. He has given Mexico and Canada until early March to meet unspecified demands, or else he may impose 25% tariffs on imports from those countries. That would hit harder than the 10% tariff on China. Imports from Canada and Mexico total about $900 billion per year, and a 25% tariff would bring $225 billion in higher costs, five times the China tally.
Trump also plans a universal tariff of 10% or so on all imports, tariffs on products from the European Union, and product-specific tariffs targeting goods such as pharmaceuticals and computer chips.
Analysis by the Peterson Institute for International Economics finds that Trump’s planned tariffs on Canada, Mexico, and China would cost the typical family around $1,200 per year in higher costs and lost productivity. If Trump levied all the tariffs he has threatened, the hit would be more like $2,600 per family. Higher prices would apply to many industrial components along with finished goods such as automobiles, appliances, electronics, building materials, medicines, clothing, food, and toys.
Some people point out that Trump imposed tariffs in 2018 and 2019 without triggering a bout of inflation. That’s generally true, but it’s also true that those tariffs did raise costs inside the United States. Automakers, for instance, paid more for tariffed steel, which raised the cost of building cars at US factories. But the effects were mild, and then the COVID pandemic disrupted Trump’s trade war in 2020 while also causing a recession that temporarily depressed prices.
Trump has proposed bigger tariffs for his second term than he imposed during his first. He’s also operating in a more inflationary environment now. When Trump entered office in 2017, the average inflation rate of the prior four years was 1.2%. The average from 2021 to 2024 was 5%. Inflation has dropped sharply from the 9% peak in 2022 to just 2.9% now. But it’s also been ticking upward for the last three months, one thing fueling reflation concerns.
The biggest difference between Trump’s first and second terms may be consumer psychology. From 2009 to 2021, inflation was nowhere to be found. The shale drilling revolution was just getting underway and producing gushers of cheap energy. Peak globalization brought cheap products to the United States from everywhere. The slow rebuild from the Great Recession kept spending gains modest.
The whole world now faces higher inflation. Drillers got burned when oil prices collapsed in 2020 and they now want to protect profits by keeping capacity tight. Trade barriers are going up in many parts of the world, pushing prices higher.
In the United States, inflation rose by more than incomes for most of 2021 and 2022, with many families only now beginning to feel like they’re catching up. The Morning Consult price sensitivity data helps explain a phenomenon that vexed the Biden administration: Voters never gave President Biden credit for falling inflation, even as it dropped by more than 6 percentage points from 2022 to 2024. Many consumers point out that a falling rate of inflation can still leave prices permanently higher, doing permanent damage to their budgets.
The Morning Consult data shows that the portion of consumers willing to forego a purchase when they notice a higher price is nearly 17 percentage points higher than the portion willing to make the purchase anyway. That’s the largest spread in surveys going back to April 2022.
Peak inflation came in June of 2022, at 9%. But inflation was a fairly new experience back then, and the portion willing to walk was only 7 points larger than the portion willing to pay. The walk-away portion has generally grown since then, even as the inflation rate has plunged. That shows inflation fatigue, as shoppers seeing price hikes month after month gradually throw in the towel and decide to do without.
There’s nothing about Trump that will make consumers inherently more likely to accept higher prices. Trump can blame Biden, and say with some justification that his predecessor is responsible for inflation fatigue.
What Americans really want to see, however, is lower prices and more affordable products. And they're watching prices more closely than ever.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman.
