Tracking the Short-Run Price Impact of U.S. Tariffs

By Alberto Cavallo, Paola Llamas & Franco Vazquez. 

"Abstract 

We use high-frequency retail microdata to measure the short-run impact of the 2025 U.S. tariffs on consumer prices. By matching daily prices from major U.S. retailers to product-level tariff rates and countries of origin, we construct price indices that isolate the direct effects of tariff changes across goods and trading partners. Prices began ris- ing immediately after the tariffs were implemented in March and continued to increase gradually over subsequent months, with imported goods rising roughly twice as much as domestic ones. Our estimated retail tariff pass-through is 20 percent, with a cumula- tive contribution of about 0.7 percentage points to the all-items Consumer Price Index by September 2025. Our results show that tariff costs were gradually but steadily transmitted to U.S. consumers, with additional spillovers to domestic goods." 

The article mentions that some prices rose more than others.  How does this work? Let's look at the graph below.

What if there is a reduction in the supply of a good? (this happens when a product is taxed, like in a tariff although the supply line actually shifts upward by the amount of the tax). If we have demand 1 (D1), price will go up quite a bit (as shown by the long green line). This is inelastic demand.

But if demand becomes more elastic and we move to demand 2 (D2), the same decrease in supply means a much smaller increase in price (as shown by the short green line). So if we have more elastic demand (D2), the price is lower than at D1 when supply decreases.

So the products that don't go up as much that the article mentions will have more elastic demand like D1.

 

One caveat. Slope and elasticity are not the same thing. Elasticity usually changes as you move along a demand curve (the elasticity going from a price of 10 down to 9 is not the same as when the price falls from 2 to 1). But if we picked two prices (any prices that are not where the demand curve hits the price axis and zero) and the calculate the elasticity, the steeper line will have a lower elasticity. 

Price elasticity of demand-It tells us how responsive quantity demanded (Q_d)is to a change in price. That is, when price changes, will the change in Q_d be large or small? The bigger the change in Q_d  the greater will be the price elasticity of demand.

We will use E_d to stand for price elasticity of demand. Here is the definition

E_d = %DQ_d /%DP

where D (the Greek letter delta) means "change in."

OR  E_d = % change in Q_d divided by % change in P 

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