Businesses Limit Pass-Through of Tariff Costs Due to ‘Price-Sensitive’ Customers

Business executives don’t feel they can pass the full cost of tariffs along to customers, as they did in 2018, according to researchers at the Federal Reserve Bank of Atlanta.

While businesses passed along almost the entire cost of tariffs to their customers in 2018, the last time there were rising tariffs, businesses surveyed in April said they expect to be able to pass through only about half of the cost, the researchers wrote in a Thursday (June 5) blog post.

The survey found “a diversity of views” among businesses, but on average the firms said they believe they can pass through 51.1% of a 10% cost increase and 47.3% of a 25% cost increase without reducing the current level of demand for their products or services.

“Compared to the 2018 episode, where research suggests nearly full pass-through of costs into prices, our results suggest many firms believe their customers are price-sensitive enough this time around (perhaps owing to the recent inflationary surge that isn’t too far in the rearview mirror) that they cannot pass through the entire cost increase without reducing demand,” the researchers wrote.

The survey also found that the greater the firm’s current level of sales revenue growth, the higher the percentage of cost increase they believed they could pass along to customers without impacting demand.

Businesses who reported their sales levels to be less than normal said they could pass through 45.6% of a cost increase, those with sales levels that were about normal said they could pass through a little more than half, and those with sales levels that were above normal said they could pass through nearly two-thirds of the cost increase.

“Given the relationship firms’ pass-through rates have to their current levels of demand, we can infer that because perceived demand is weaker now than in the prior period of trade and tariff tensions, firms will be more hesitant to fully pass through tariff-related cost increases,” the researchers wrote.

The Federal Reserve Bank of New York reported Wednesday (June 4) that three-quarters of companies across manufacturing and service industries have passed along their higher input costs to end customers.

Nearly a third of manufacturers and about half of service companies said they had passed all of those higher costs to consumers.

The PYMNTS Intelligence report “Tariffs and Business Uncertainty: The Current State of Play” found that 42% of goods firms and 21% of services firms said they planned to increase prices in response to tariffs.