Morgan Stanley strategists warn that escalating tariffs are acting as a double-edged sword, simultaneously increasing both consumption and production costs, thereby fueling inflationary pressures and eroding corporate profit margins.
Despite the average effective tariff rate on U.S. imports sitting at 8.9% in June 2025 – lower than the firm’s projected 16% – the sheer volume of duties collected is alarming. A staggering $94 billion in tariffs were collected between January and June, exceeding the total collected for the entirety of 2024 ($76 billion).
This impact, however, is far from uniform across sectors. Consumer goods are bearing the brunt, with apparel facing the highest tariff rate at 24% in June, followed by furniture (16.1%) and motor vehicles (15.8%). In contrast, inputs like paper products and chemicals experienced significantly lower tariffs, ranging from 3% to 7%.
Businesses, according to Federal Reserve surveys, are actively implementing mitigation strategies. These include accelerating imports, stockpiling inventory, and restructuring their supply chains to minimize the impact.
The July Beige Book reveals a significant challenge: many firms struggle to fully pass on increased costs to consumers due to pushback, forcing them to absorb some of the burden or postpone investments. This uneven impact is evident in recent earnings reports.
Caterpillar estimated $1.3–$1.5 billion in tariff-related costs this year, but largely offset them through pricing and sourcing adjustments. Nike plans to reduce its reliance on Chinese imports by 2026 drastically. Procter & Gamble, while acknowledging tariff impacts on a quarter of its U.S. SKUs, indicated it would absorb a significant portion of the added costs this year.
Morgan Stanley emphasizes that while tariffs are already contributing to goods inflation, the full price increases are not yet reflected in available data. The bank anticipates further price hikes in the coming months as the ripple effects of these tariffs fully manifest themselves, resulting in a sustained period of inflationary pressure and uncertainty for both consumers and businesses.
