Winter Is Coming? Firms' Cost and Price Expectations in the Wake of Tariff Hikes

Winter Is Coming? Firms' Cost and Price Expectations in the Wake of Tariff Hikes

A striking feature of this year's tariffs has been their (apparently) subdued impact on US retail price growth to date. Indeed, core goods prices (which exclude food and energy) have risen at an annualized rate of roughly 2 percent since the tariff announcements in early April. For comparison, the annualized growth rate in core goods prices was slightly negative during the long prepandemic expansion (July 2009-February 2020). And-although there might be a few reasons for the relatively small tariff passthrough onto consumer prices (including pauses between tariff announcement and enactment, which allowed many firms to build their inventories)-this lack of an initial surge in prices has prompted renewed debate over whether inflationary fears from tariffs were overblown.

From our perspective, an important place to look for answers to that debate ultimately rests with businesses-the price-setters in the economy. To that end, in this blog post we investigate cost and price expectations from the Atlanta Fed's Business Inflation Expectations (BIE) survey and The CFO Survey (a quarterly survey of CFOs that the Atlanta Fed conducts in partnership with the Richmond Fed and Duke University). As a preview, firms overall anticipate elevated price growth over the coming year, despite some softening in the trajectory of unit cost growth. Importantly, even firms that source all their inputs domestically (and are thus less directly exposed to tariffs) have ratcheted up their price growth expectations relative to this time last year.

Around two-thirds of respondents to these surveys imported at least some portion of their inputs/supplies from abroad, while the rest source all their inputs domestically, as figure 1 shows. We compare these two groups to see if importing firms-which are more exposed to tariffs-expect meaningfully different outcomes for their business.

In both the BIE and CFO surveys, average unit cost growth expectations have edged lower in the months since the tariff announcements in early April (figure 2), but they remain elevated relative to last year (before tariffs were implemented). Interestingly, unit cost expectations from domestic-sourcing (nonimporting) firms in the BIE have softened materially in September, a dynamic we have not yet detected in the CFO survey (which was last in the field between August 18 and September 5), a disparity likely resulting from differing time horizons over which questions are asked. The BIE survey elicits expectations over a 12-month-ahead horizon, while The CFO Survey gathers them for the current and next calendar years.

Like unit cost expectations, average price growth expectations across both surveys remain elevated relative to last year. Most worrisome is that expectations among nonimporting firms have risen sharply (figure 3). The fact that firms not exposed to tariffs expect to accelerate price increases suggests some risk that inflationary pressures are broadening beyond those firms and industries directly affected by tariffs (a finding consistent with other recent Atlanta Fed research).

Digging into the distribution of price growth expectations, while the means across both surveys showed some modest softening relative to the expectations that prevailed in April/May, this softening appears to be driven by firms in the upper tail of the distribution (that is, firms at or above the 90th percentile in the cross-section). For example, in The CFO Survey, the 90th percentile for 2025 price growth expectations during the second quarter (fielded between May 19 and June 6) was 15 percent. In the third quarter survey (fielded between August 18 and September 5), the 90th percentile had ebbed to 10 percent. This moderate tightening of the upper tail of the distribution might reflect some reduced uncertainty over tariffs following the Administration's announcements that took effect in early August , which may have assuaged some fears about the potential for more extreme outcomes.

There's another possible explanation for the slight reduction in expectations for price and cost growth this year relative to earlier in 2025: some firms might anticipate a more prolonged passthrough of cost increases into prices, spilling more significantly into 2026. Since the first quarter-and to a greater extent than nonimporting firms-importing firms have steadily increased their expectations for unit cost and price growth in 2026 (figure 4). This finding suggests that some of the modestly reduced unit cost and price growth expectations we observed this year might instead reflect cost and price growth that will materialize next year.

The impact of tariffs on consumer prices has been surprisingly muted. The standard thinking regarding tariffs is that they represent a one-time shift in the overall price level, but as Chair Powell noted in a speech last month, "A 'one-time' increase does not mean 'all at once.' Tariff increases will likely take some time to work their way through supply chains." Indeed, the lack of immediate passthrough might be related to gaps between the announcement and imposition of new tariffs, uncertainty over the where tariff rates will ultimately land, or the choice by importing firms to respond to tariff-related cost increases by squeezing their own profit margins rather than increasing prices to customers.

Responses to our business surveys suggest a delayed-but nevertheless meaningful-impact from tariffs. Firms' unit cost and price growth expectations have risen markedly since this time last year, with prices expected to remain elevated into 2026. At the same time, even nonimporting firms that are not directly exposed to increased tariff rates expect an acceleration in price growth, suggesting some broadening of price pressures.

Ample uncertainty over the trajectory of price growth remains and may ultimately hinge on whether the strength in demand is sufficient to weather the impact of higher price growth. If demand softens, firms may be dealing with squeezed margins instead.

This places a policymaker in a position similar to a weather forecaster. The forecaster, when faced with an unseasonably mild October and November, must assess if the mild weather will continue or if weather patterns will revert to more serious winter dynamics. Similarly, a central banker, when faced with mild price changes, must assess if that mildness will persist or if more significant changes may be on the horizon. Firms responding to our surveys-one input a central banker would consider-anticipate that the mild weather is unlikely to last. Their forecast is that winter is coming.