{"id":23074,"date":"2025-08-06T16:12:32","date_gmt":"2025-08-06T20:12:32","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-us\/?p=23074"},"modified":"2025-08-06T16:12:34","modified_gmt":"2025-08-06T20:12:34","slug":"transmission-framework-how-tariffs-will-flow-through-the-us-economy","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-us\/insights\/transmission-framework-how-tariffs-will-flow-through-the-us-economy","title":{"rendered":"Transmission framework: How tariffs will flow through the U.S. economy"},"content":{"rendered":"\n

By Frances Donald and Mike Reid<\/strong><\/p>\n\n\n\n

\n Economists are making a range of assumptions about how tariffs may work\n their way through the economy without relevant historical precedent. Using\n our own set of assumptions, we expect tariffs will weigh on the labor\n market and put upward pressure on inflation, exacerbating our view that\n the U.S. economy is in a stagflation-lite scenario.1<\/sup><\/a\n >\n <\/p>\n

\n But, when and where those pressures show up will ultimately come down to\n two core questions: How much inventory has accumulated in the system ahead\n of the implementation of tariffs, and how much of the cost of tariffs\n businesses will pass to consumers?\n <\/p>\n

\n As policies continue to evolve in the coming months and data begins to\n show evidence of the impact of tariffs, RBC Economics will be using a\n transmission framework as a roadmap to monitor the fallout.\n <\/p>\n

\n Here\u2019s a deeper look at how we are thinking about this historic economic\n shock:\n <\/p>\n \n

Impact of tariffs on U.S. economy and inflation<\/h3>\n
\n
\n \"Impact\n

\n The graphic shows the projected impact of tariffs on the U.S. economy\n and inflation as a series of stages: 1) Front loading, inventory\n build; 2) Tariff implemented; 3) Inventory drawdown on pre-tariff\n prices (varies by sector); 4) Imports resume, inventory rebuild with\n tariffs applied; 5) Producer price pressures build; 6) Some consumer\n pass-through, CPI builds (varies by sector); 6) Demand destruction,\n revenue declines; 7) Margin compression and some layoffs.\n <\/p>\n

* Varies by sector.<\/p>\n

Source – RBC Economics<\/p>\n <\/div>\n <\/div>\n \n

The big inventory question: How much time do we have?<\/h2>\n

\n Q1 gross domestic product data shows us that businesses heavily\n front-loaded goods ahead of tariff implementation with a meaningful surge\n in imports and resulting jump in inventories.\n <\/p>\n

\n Until those inventories are drawn down, the impacts of tariffs on the\n economy are stalled as businesses sit on and sell goods at pre-tariffed\n prices. As long as inventories remain bloated, we think it will be\n premature to claim definitively that tariffs will not slow growth or push\n up prices.\n <\/p>\n

\n How long will it take for inventories to be fully used up?\n Problematically, it isn\u2019t straightforward to get a clean read.\n <\/p>\n \n

First, the inventory build varies considerably by sector.<\/h3>\n

\n Durable inputs, like metals or motor vehicles and parts, may be stored for\n much longer than non-durable goods like food products, which do not have a\n substantial shelf life.\n <\/p>\n

\n The Monthly Advance Report on Durable Goods showed fabricated metal\n products as well as electrical equipment and appliances both reported\n upticks in recent months. Though we suspect the report is understating the\n full magnitude of the buildup, and we expect to see more upward revisions\n as new data becomes available.\n <\/p>\n \n

Second, inventory data is lagging the real-time economy.<\/h3>\n

\n The national accounts data showed the U.S. trade balance fell by close to\n $1.4 trillion in Q1, and yet real inventories ramped up by (a still\n sizeable but much smaller) $160.5 billion.\n <\/p>\n

\n Interestingly, the Advance Report on Durable Goods has yet to show a\n meaningful ramp-up in inventories that matches the national accounts data.\n The data being recorded by businesses and collected by government agencies\n may not fully align, which could instigate a delay in imports being\n reported as inventories.\n <\/p>\n

\n Additionally, as tariffs are implemented, the use of bonded warehouses may\n further complicate the reporting process, because goods in bonded\n warehouses are not cleared by customs for domestic distribution.\n <\/p>\n

\n We expect it will take time to get an accurate picture of the magnitude of\n the inventory build on a sector basis, and there will likely be\n significant revisions throughout this process.\n <\/p>\n \n

\n Third, the pace of inventory drawdown largely depends on consumer and\n business demand.\n <\/h3>\n

\n Stronger consumer activity will likely result in a faster depletion\n whereas a pullback in consumer spending and\/or business investment could\n lead to a more prolonged drawdown.\n <\/p>\n

\n Recent retail sales reports reflect sustained demand for consumer goods,\n but also signal pre-tariff front-loading by consumers as well (notably in\n autos). That could imply that recent consumer demand won\u2019t be sustained.\n Importantly, we continue to expect high-income consumers will dominate\n consumption activity and have much higher levels of resilience.\n <\/p>\n \n

\n Fourth, the volatility of tariff policy, including delays, may have\n encouraged multiple front-loading cycles that further muddy the clarity of\n inventories builds.\n <\/h3>\n

\n Based on data we have now, we estimate the aggregate economy has as much\n as a five months of inventory buildup. In non-durable products like\n pharmaceuticals which expire, for example, that horizon is shorter.\n <\/p>\n \n

Q1 import and inventory spike preceded tariffs<\/h3>\n
\n
\n \"Quarter-over-quarter\n