Comment by greybox
16 days ago
If a pair of shoes today costs $30, and a pair of shoes tomorrow costs $60 (not saying this will happen, just positing a scenario), from a consumer perspective, there has been 100% inflation in the price of shoes. It doesn't matter that the price increase is due to tarrifs on imports from Vietnam.
I'm an American that owns/operates a design and manufacturing company -- we build customer products in China and export to USA buyers. Let's say we build the customer product and sell it to them for $20 ex-works China. That means USA customer must pick it up at our dock and pay the shipping fee. Lets ignore the shipping fee to keep it simple. Assume USA customer currently sells the product for $80 in USA. If USA customer now needs to pay 35% import tariffs on $20/unit, then their cost goes up $7 USD. If USA customer passes 100% of that cost to their own final end customer, then they need to start selling it for $87 USD. So 35% tariff ultimately turns into a price increase of 8.75% for consumers.
But actually, tariffs have been 10-25% anyway for a number of years. So for existing products, some tariff cost was already included in that $7 total tariff cost. So, for existing products, the cost may go up ~$3.50 and our customer would sell it for ~$83.50 and the actual increase consumers would see is ~ 4.5% increase.
Now, this is a typical pricing scenario for our USA customers, they are selling individual products that cost $20 in China at volume, in USA at retail for ~3x-5x the per unit purchase cost from China, this is quite common. Now, the USA customer must buy ~5000pcs to get that $20 USD unit cost, while consumers get to buy only 1pcs and pay $87 USD, whether or not that is fair pricing given the risks and R&D costs, that's just the reality. Anyway, I'm not sure of the ex-works cost of shoes, but I'm highly confident big brands like Nike sell them for at least 5X the ex-works cost. So the math would be similar.
From what I've seen (briefly worked at a logistics company and would see companies POs), apparels seem to be more in the 5x to 10 range.
If you're directly passing the tariff increase along, without markup, are you comfortable reporting to your stock holders a decrease in margin?
Yes and there will be the usual political consequences associated with inflation; but this type of inflation is caused by a tax and cannot be combated by raising interest rates.
It most certainly can, though you would have to push interest rates much higher than normal to kill demand enough to have an effect.
Why wouldn't a rate hike make a difference? It will lower demand and therefore prices, no? I mean, this isn't really something that we should celebrate or want, since it essentially just means discouraging people from buying shoes because they can't afford it, but it does bring the prices down (or at least slow the rate of shoe price increase).
A couple of things. In practice, most goods are actually priced as cost-plus, with very thin margins, and any response in prices is highly asymmetric.
If the purchase costs for a good suddenly increase, retailers will increase prices very quickly because they would otherwise start losing money very quickly.
If demand for goods decreases, that doesn't affect the retailer's cost of goods at all, and if they were to reduce their prices, they'd eliminate their thin margins. From their perspective, it's better to sit on inventory for a while.
So any downward pressure on prices would happen much more slowly.
BTW, this kind of asymmetry is why a bit of inflation is good, actually. Inflation acts as a universal and permanent downward pressure on (real) prices, in the sense that if retailers and others are unable to justify an increase in nominal prices to their customers, their real prices will drop.
True but that mechanism is indirect at best. Usually high interest rates discourages more borrowing and lowers spending that way.
But in this case the price increase is already due to the government putting its thumb on the scale. The best way to reduce the price is not via the Rube Goldberg interest rate mechanism to shrink spending and thus demand for the $60 shoe, but by removing the tariff and make it a $30 shoe immediately.
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This is blatantly false. You just have to look at Jerome Powell's reasoning in 2018-2019 and just last month!
It's only inflation if you also double your earnings (tongue in cheek, this takes obviously place on a macro scale). This is about balancing costs. Globalization created environmental externalities that are not sustainable. While you enjoy the $30 pair of shoes, the people by the factories suffer. Almost nobody importing goods is really checking the supply chains properly enough. We have pretty strict EPA laws here that are a tariff in their own way.
But the Fed is not the consumer
But (as I understand it) how the Fed tracks inflation is the consumer price index, which does take things like "the price of shoes" into account.