It felt like the start of another busy week as I wrote this yesterday morning. Aren’t they all busy? We have new tariffs on trading partners, renewed war in the Middle East impacting oil prices again, and we have a Fed interest rate decision on Wednesday.
Here are some updates along these lines.
First, regarding new tariffs…
Tariffs are taxes and the main questions are the average dollar amount of the levies and who ultimately pays them. Our average tariff rate was low before rising dramatically following Liberation Day back in April last year. Much of that dropped off pretty quickly before settling around 10%, as seen in the chart below. The Trump administration has upped the ante again by announcing new 50% tariffs on certain Canadian products, as well as on products coming from other countries. Analysts are expecting these new tariffs to be stickier than last year’s because they’re based on different legal frameworks. The details of how that works are way out of my lane but, at least in theory, these higher costs could continue to be absorbed by businesses but may eventually find their way into overall inflation numbers that have been trending lower lately.
Here’s some commentary on this from JPMorgan, along with the chart I mentioned…
The average U.S. headline tariff rate has moderated meaningfully from its April 2025 peak, as the authorities under which the administration has attempted to impose tariffs have continued to evolve. After briefly reaching 18%, the average headline tariff rate has fallen to roughly 10%, although it remains well above pre-2025 levels. Much of the decline reflects the Supreme Court’s ruling against the administration’s use of tariffs under the International Emergency Economic Powers Act (IEEPA), which led to the removal of many emergency tariffs. Looking ahead, however, new sector-specific tariffs under Section 232 are expected to offset part of this decline, leaving the average tariff rate elevated relative to history.
While the headline tariff rate captures announced policy, the realized burden on businesses has also eased. The effective tariff rate - which reflects actual duties paid as a share of goods imports - fell from a peak of approximately 12% late last year to around 7% in May, as the IEEPA tariffs were replaced by temporary tariffs at a lower rate under a different authority. At the same time, tariff refunds surged following the Supreme Court’s decision. The Treasury paid $49.2 billion in tariff refunds in June, roughly double new tariff collections for the month.
Preliminary analyses suggest that much of the tariff burden was absorbed by the companies themselves, rather than being passed onto consumers. Whether companies continue to absorb tariff costs will be important for corporate profits and inflation going forward. However, with a lower headline rate, neither threat is as significant as it was a year ago.
Regarding war and oil prices…
Understandably, oil prices have been all over the place since the Iran War began several months ago. Earlier this summer, however, the US benchmark price had fallen basically to pre-war levels, which was optimistic given that no meaningful advances toward peace had been made. Prices quickly rose about 35% off those lows before coming back to where we are today, about $81 per barrel. That’s interesting, but where it hits most of us is at the gas pump. According to AAA, average prices in California are about 26% higher for regular gas than a year ago and 32% higher for diesel. That roughly matches increases to the national average, although the dollar value is higher in California and diesel prices have risen more in percentage terms.
In short, that price dip at the pump you noticed earlier this summer may not last very long, or at least not until about 15-20% of the world’s oil shipments are consistently back online again via the Strait of Hormuz. How long until that happens is anyone’s guess.
Regarding interest rates and the Fed…
We have a regularly scheduled rate announcement this week. As I type, markets are pricing in a 2/3rds chance of no rate increase, but that leaves a 33% chance the Fed bumps short-term interest rates up a quarter point. I suggest that’s unlikely given how inflation numbers have been trending lower in recent weeks. Still, new tariffs and higher gas prices add layers of uncertainty about inflation going forward, even if they won’t actively contribute to this week’s rate decision. Accordingly, markets are pricing in one, maybe two, rate increases this year. So, “up” is the direction everyone seems focused on right now, even with a new Fed Chair. For example, as of this morning I have to look all the way out to a year from now to see the market pricing in a scant 0.3% chance of a rate decrease. That’s an ironic turn of events for a President who spent so long hammering the former Fed Chair to lower rates, but I digress…
Lastly, I’ll leave you with what’s maybe an optimistic thought from an economic perspective. I say “maybe” because the growing AI industry is both good and bad, with the ultimate blend depending on your perspective. Anyway, planned capital expenditures by “hyperscalers” creates a ton of economic activity wherever data centers and various other infrastructure is built and brought online. The graphic below, also from JPMorgan, shows the planned spending increase of a handful of these companies over this year and next. According to a Google search, the dollar amounts in the blue bars are roughly equal to the GDP of states like Ohio and Pennsylvania with roughly 11 million and 13 million residents, respectively. Ironically, these same companies are seeing their share prices get whipped around lately because they’ve risen too quickly, but these massive investments help provide a tailwind for the broader economy.
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