How Tariffs Could Push Prices Down

By Ed D'Agostino | March 07, 2025

The tariff situation is evolving fast. On Tuesday, imports from Canada and Mexico faced 25% tariffs. On Wednesday, President Trump granted US automakers a 30-day tariff exemption. On Thursday, he paused most of the new tariffs until April 2.

I won’t pretend to know where things will stand when this hits your inbox Friday morning. But we should still discuss the impact of tariffs.

The assumption is tariffs will lead to higher prices. Will they?

In isolation, tariffs appear inflationary. A widget is imported from Canada. Last week, that widget cost the buyer $100. Tack on a 25% tariff, and it still costs $100, plus $25 due to the US government.

That widget probably is a part, or an input, to a bigger product. It will be combined with other widgets, until finally there is a fully assembled item ready to be sold. Some of its components will be subject to tariffs. Others, maybe not. Even if the combined input costs for the final product have not gone up by 25%, they will have gone up some. And the increase will either be absorbed by the producer, meaning their profits will drop, or the increased cost will be passed on to consumers (or likely a combination of the two).

This is what the mainstream media is reporting. But there’s another side to the story. Demand.

If the average price of almost everything increases by a meaningful percentage, will sales of discretionary items drop? My guess is they will. And a drop in sales could actually be deflationary, as it might tip the US economy into a recession. This might be the bigger risk with tariffs: They’ll reduce consumption, which will slow the economy, putting pressure on prices and profit margins alike.

Americans buy a lot of stuff from Canada and Mexico—a combined $918.6 billion in 2024. This includes oil, electronics, cables, machinery of all types, medical instruments, furniture, commodities… and these are the broad categories. Break it down into items (refrigerators, beer, liquor, mattresses, surgical devices, potash, lumber, etc.) and the list becomes pages long.

The US also imports more vehicles from Mexico than it does from any other nation. A hefty 22.8% sold in the US come from our southern neighbor.

My friend Jared Dillian shares my concern regarding deflation. The former Wall Street trader joins me this week at Global Macro Update to discuss tariffs, the rising risk of a recession, and why he’s “super bullish on bonds.”

Think about a car, which had an average sticker price of about $48,000 in 2024. What would happen if it jumped 25% to $60,000? Does demand hold steady?

$60,000 is a lot of money for most people. Americans financed 80% of their new car purchases in 2024. Auto loan delinquencies of 90-plus days rose to 4.83% Q4 2024. In other words, the average car-buying American is already stretched when it comes to their car payment.

In the short term, fewer Americans will be approved for new car loans at the new price level. Will this lead to fewer sales, a drop in profits, a recession… or will it lead to wage inflation to match the slew of one-time price increases?

I don’t think anyone knows… but it is worth considering the less reported potential outcome.

As Jared says in our discussion:

The conventional wisdom is that tariffs are super inflationary. We're going to be paying 25% more for all these goods. It causes inflation. Actually, what tariffs do is they slow down the economy and it's a deflationary force.

Add in the potential for recession and higher unemployment, which Jared says could rise to 6%–8%, and you have even more deflationary forces at work.

In today’s interview, you will also hear:

Jared’s concerns about the US housing market (he notes that single-family home inventory is at its highest level since the financial crisis)

Signs that oil prices might be bottoming (I sure hope so, as I am long oil producers!)

How to position your portfolio for whatever lies ahead

Click the image above to watch our interview now. A full transcript of our conversation is available here.

And be sure to sign up for Jared’s free weekly market letter here.

Thanks for your support.

P.S. If you find this letter valuable, you should consider investing with me in Macro Advantage—where we uncover the forces shaping tomorrow’s markets, identify companies poised to thrive, and build resilient portfolios designed to weather inflation, economic shifts, and geopolitical shocks. Click here to learn more.

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