Businesses are passing along tariff costs, Fed reports

They are the exact same thing. The value of money is, at its base, what you can buy for it. This is inflationary because you are saying that a dollar will buy you, as a consumer, less of a product than it would have pre-tariff. Inflation is calculated by the change in price of a basket of goods, weighted by spending/consumption patterns.

 

Trump's tariffs also make no sense on many levels. This includes now the new deal with Japan, which means the price of Toyotas are going to increase less than the price of Fords and GM vehicles. Many of the car parts for domestic autos come from Mexico or Canada which now has a 25% tariff. Toyota, which imports mostly from Japan and has factories in the US will only see 15% tariffs.

As a result, Ford and GM stock prices are down, and Toyota's took a nice jump today. And while the price of a new Toyota is expected to go up a smaller percentage now than Ford or GM cars, they are still going to rise.

 

Well the tariffs/inflation have been greatly helpful to my family..... Yeah, we haven't been able to go out shopping as much as we used to cause of prices, so in turn we are saving some money...
Thanks ohhh great and might Orange Skidmark!!!!

 

Can you add some color to that, it only makes half sense to me. In its simplest form, I see what you mean. However, the tariffs aren't expanding the supply of money or devaluing the dollar. They're cost based. I see it as more like a "consumption tax" or a sales tax. It's changing the real value of a good or service, not the value of the currency needed to purchase (which is how I would classify inflation). Make sense?

 

It is a consumption tax if passed through. And yes, that changes the amount of currency needed to obtain a product. If something costs $10 and a 10% consumption tax increases it to $11, then the price of that item increasing means that the dollar just became worth a little less to me as I can now buy less stuff with it.

The value of the dollar isn't set by the supply of dollars alone. Generally, one of two things will happen: a person will pay more to buy the same amount or they will buy less than they used to buy.

 

See that's where you lose me. What's to keep me from finding another vendor that wasn't subject to the tariff increase? It's a cost-based change in the real value of the item, not a change in the purchasing power of the currency which would be agnostic to the vendor or the item.

 

First, in order to buy a different product of equal cost and quality, you must assume one exists. Many times yes, but quality is often subjective and many people are brand loyal.

Second, while tariffs force competitors who import to raise prices, domestic producers often raise prices as a result. Take the $10 product that's now $11 because it's foreign and subject to tariffs. A domestic producer who has a comparable product at the same cost can now raise prices $.50 and still beat the competition on price. And little to nothing is stopping the domestic producer from doing so.

Or, if the domestic producer already cost $10.50 for a comparable product, he's now a price leader in the market and did nothing to lower costs. And now, you can't pay $10 because that option is gone.

 

You could invest some of those savings into the stock market.....The DOW just hit an all time high.

 

Oops! my mistake the highest the dow has ever closed was 45,014.4.. Today's close was 45,010.29

 

Inflation is 2.4-2.7 y/y, and that's mostly due to housing/shelter.

So, where's the higher costs?

 

Brand loyalty doesn't equal inflation. Again, you're talking the real value of a good or service, not the purchasing power of the currency.

Closer due to the soft rise in the floor of the market but it's still a change in real value, not the purchasing power value of the currency. In your example, what stops the domestic producer would be called competition. Raise your prices too high and you create an opportunity for market entry to undercut your prices and steal your business.

That's partly why rents increase year over year. The classical definition of inflation doesn't immediately mean higher prices.

 

Competition could enter a market. But if the market is mature, the cost of entry into it would be very steep and prevent new competition from entering. During Trump's first term, he raised tariffs on new washing machines. Prices rose for both foreign and domestic products. Why did no new competition spring up and take all the business? Likely because the cost to enter the market is high and it's difficult to earn market share.

Think about it. If a new manufacturer wanted to enter the washing machine market, how long would it take? Minimum of months to build or retrofit a factory, secure part supply lines, train workers, work out distribution agreements, etc. And if you're a no name brand, you will have to convince consumers that you're product is a quality one even with your discounted price. Because those who can afford to are likely not going to skimp on quality when it comes to big ticket items like washers.

As for what's driving prices up? It's more than just shelter. Both food and medical care services are outpacing average inflation rates as of the last report.

 

Nothing. The same nothing that stops that vendor from now raising their prices due to the decreased price competition.

Pricing isn't generally cost-plus. If the next-best alternative product increases in price, a firm acting rationally will likely raise their price. In fact, that is one of the key explanations for how "tariffs" work, by allowing domestic firms to collect higher prices than if they had stronger competition.

 

There is a pretty sharp turn in the previous pricing declines in large-scale durable good.

 

I don't disagree, it absolutely does take a significant cost to enter the market and it isn't quick to establish a reputation. But, what I said was that raising prices simply in reaction to tariffs levied on foreign competition creates the opportunity for market entry. This is longer than short-term. Again, my argument isn't whether the policy is beneficial or not; in my view it isn't the way to go. I'm arguing against it being inflationary. It changes the real value of a good or service, not the value of the currency supporting it.

It's worth noting that I'm being slightly "devil's advocate" because I'm learning as much in this discussion from you and from @mdgator05 as from outside research sources. I appreciate the honest conversation rather than the usual tirades of tribalistic tripe THFSG offers.

 

You'll have to further define what you mean by "cost-plus". I work in government contracts so that may have a different definition to me. To me it's a contract type where cost excesses and risks are assumed by the customer.

 

In pricing, that refers to pricing something based on its cost. So, for example, I look at the costs of our product and decide to double the costs to set a price (e.g., our product costs $5 to make and we then sell it for $10).

In reality, pricing is generally based on value, competition, and differentiation. Cutting competition via tariffs results in increases in pricing, even for those who receive no additional costs, under most circumstances.

 

OK, so what you're really talking about is setting how to set your profit margin percentage (gross margin, Return on Cost, etc depending on your calculations)?

 

From my understanding, Desert's concise explanation of a cost plus contract is correct.

 

Essentially, yes.