MNI INTERVIEW: Fed Surveys Track Which Firms Will Raise Prices

U.S. businesses are likely to raise prices in a high-tariff regime even as they see demand as weaker now compared to President Donald Trump's first term, boosting the risk of both higher inflation and a slowdown in economic activity, Federal Reserve Bank of Atlanta economist Brent Meyer told MNI.

Firms in the Atlanta Fed district on average expect to be able to pass through about half of a cost increase of up to 25% without suffering a reduction in demand, according to the bank's latest Business Inflation Expectations survey, fielded in early- to mid-April after Trump unveiled reciprocal tariffs on most trading partners. 

"That doesn’t mean that firms are not going to pass through everything. It means, if they do, they’re well aware that will lead to lower demand," Meyer said in an interview Friday ahead of the Fed's communications blackout period. According to the survey, firms now perceive sales levels to be 8 percentage points weaker than normal on average, whereas in the 2018-19 period, when all of President Trump's first-term tariffs were passed through to consumers relatively quickly, they considered them to be about normal. 

The survey shows a clear relationship between the strength of a firms' sales levels and how much a business believes it can raise prices without hurting sales, Meyer said. 

"Firms with sales levels stronger than normal think they can pass through a lot more without damaging demand," he said. Smaller firms, which currently see sales as 9 percentage points below normal, compared to 3.5 points below for larger companies, may be much worse off than their larger competitors, he added.

TARIFFS AS PRETEXT

If businesses pass on all of the current costs of tariffs, research by the Fed bank estimates retail prices would increase about 1% over the next year, "a meaningful amount," Meyer said. The behavior of firms not directly affected by tariffs could add to the upside risk for prices, he added. 

Two other surveys in the field this month will attempt to get a sense of whether companies that rely less on imports are passing on cost increases, said Meyer, head of the Atlanta Fed's Economic Survey Research Center.  

"You could have a situation where the modal firm exposed to tariffs doesn’t pass through all of it, but you have firms not exposed that can pass through say a third of the tariffs cost," he said. 

"My worry is firms will think they have an ability to raise their prices in this environment that will touch off an inflationary impulse that would at the same time lead to damage in demand. 

"You see demand fall, sales levels fall, and real output would slow at the same time we see higher inflation, and that’s a bad place to be." (See MNI INTERVIEW: Inflation Expectations Troubling-Gorodnichenko)