For years, inflation has been thought of as a “macro” problem — something that moves like the tide, affecting everything and everyone more or less the same way. The assumption was simple: when prices rise, they rise everywhere, and when they fall, they fall together.
But that’s not really how it works anymore. In the current conditions, inflation doesn’t spread evenly. It affects across sectors differently, rewarding some companies while punishing those exposed to tariffs.
Tariff inflation has a varied effect
According to the Goldman Sachs analysis, the share of tariff costs carried by U.S. consumers is expected to jump from 22% in June to 67% by the end of the year. Put simply, due to recently introduced tariffs, many enterprises have received additional costs. Instead of bearing on their own, they are pushing them onto customers through higher prices.
However, this opportunity is available only to those businesses that have what we call “pricing power.” This means they can raise prices without losing audience because their products are loved and unique, or have few substitutes. Others have little pricing power, so they must deal with higher costs on their own or risk losing market share.
This can be better understood with examples:
- Any luxury brand can increase prices almost without any consequence. People loyal to Apple or Louis Vuitton might resist first, but they will still end up buying the product.
- Meanwhile, a low-margin retailer among stronger competitors does not have that opportunity, because people chose it for cheaper prices. If they raise them, they lose customers immediately. But the thing is if they don’t, their margins will jump so fast that only big investments would save them. It is the same inflation shock, but the outcomes seem to be completely different.
Beyond luxury brands, other sectors stand out clearly as well. Tech platforms with built-in networks (think Microsoft raising the cost of Office subscriptions) can ask more without losing much demand, as transferring to the alternative may be more costly both in terms of time and money. The same comes to healthcare firms that have inelastic demand; people don’t shop around for drugs the way they do for sneakers. They will buy the products from the need and no inflation can change their behaviour.
Industries damaged by tariffs most
Not every sector has the pricing power needed to easily absorb tariffs, and some have been hit particularly hard. Manufacturing, for instance, faces significant challenges nowadays, because it’s an industry that relies on imported raw materials such as steel and aluminum. American car and appliance producers, dependent on imported parts, have seen costs rise directly as tariffs increased. Unlike the luxury market, these industries compete in tight markets where consumers tend to delay purchasing expensive items like cars when prices climb. That’s why so far, they are suffering under the weight of increased costs, losing billions.
Agriculturular sector has also been challenged because of the tariffs. Farmers, who rely on exports (soybeans, pork, and other commodities), have faced their sales drop as new tariffs emerged. At the same time, machinery and fertilizers have become more expensive, leaving many small producers squeezed from both sides. Last time, in 2018, tariffs cost the industry more than $1.7 billion. Like it or not, this time the effect could be much worse.
Retailers experience the same hit, though for a different reason. Many U.S. chains, like clothing stores, rely on low-cost imports from China. Tariffs immediately raise their procurement costs, but given customers’ sensitivity to price, raising prices could make people stop shopping there entirely. Without the brand loyalty like with premium labels, they face a dilemma: absorb the losses or lose the customers. Some might try to buy from other countries to avoid additional costs, yet that’s not always practical for big orders.
What does it mean for investors?
Previously, investors could view inflation as a universal risk — the external shock happened and all the prices in all industries suddenly went up, no matter what the size of business. But when inflation and tariffs no longer spread evenly and create winners and losers, that means investors need more selective strategies.
The good news is that such volatility also creates chances. History shows that after a hard year in terms of tariffs in 2018, global stocks did well in 2019. The U.S. went up 32%, Europe 26%, and emerging markets 19%. When things look less scary than expected, small drops in the market usually don’t last long, and who knows, maybe this year we can expect the same.
So, the key for investors now is to avoid the most exposed sectors, and take advantage of opportunities that short-term turbulence creates. Progressive industries, like AI, will continue its development and growth, especially against the expectation that the Fed will cut the rate shortly. Also, it’s worth taking a look at the companies that don’t rely on exported details and manufacture everything in one country. This doesn’t obligatory mean the focus on the USA — regions such as Europe, Mexico, and Southeast Asia could benefit from changing trade patterns as well.
Written by Alex Tsepaev, Chief Strategy Officer (CSO) at B2PRIME Group.
Alex held key positions in banking and financial services, shaping market strategies and regulatory compliance. He has also contributed to global financial regulation through his work with IOSCO, the Basel Banking Committee, and IAS.
