The US economy narrowly avoided soaring inflation due to companies ordering massive quantities of goods in anticipation of tariffs and subsequent price increases. Now, as those inventories dwindle, companies must restock at higher prices. This shift will significantly impact consumer prices, particularly for basic goods like clothes and cars.
In the first quarter, companies built up their inventories before Trump’s tariff plan took effect, delaying price hikes for consumers. However, these stockpiles are now dwindling, and costs have risen. Companies must restock at higher prices, leading to potential price increases for consumers.
Economists are closely monitoring how tariffs affect consumer prices. Dryden Pence, chief investment officer of Pence Capital Management, notes that companies “were basically buying things at a discount to their future cost.” As inventories disappear, this trend will reverse, and companies will pass on costs to consumers or see their margins fall.
The Federal Reserve is watching these developments closely, as companies raising prices could lead to inflation. Conversely, if companies cut costs by layoffs, unemployment might spike, prompting a rate cut.
Basic consumer goods, such as clothes, toys, and furniture, are likely to be affected first. Cars, however, will serve as an initial bellwether due to the complexity of their supply chains. Import prices for component parts, rather than finished goods, are more telling of inflation’s impact.
The June inflation report showed a 2.7% increase in prices over the past year. However, some categories, like apparel and home furnishings, saw sharper increases, potentially signaling that tariffs will be passed on to consumers. The inventories are expected to dwindle within one to two months, at which point companies will need to restock at higher prices.
Analysts predict car prices will rise in the third and fourth quarter of this year, especially considering the complex supply chains involved. As inventories deplete, the US economy will transition into a true tariff environment, where companies must pass on costs to consumers or see their margins fall.
Source: https://fortune.com/2025/07/17/inventory-stockpiles-dwindling-tariffs-economy-inflation