Companies Are Running Out of Ways to Keep Tariffs From Raising Prices. The Hit May Still Be Coming.

Shoppers outside a Burlington store at an outlet mall on Black Friday in Sunrise, Fla, on Nov. 28, 2025. (Eva Marie Uzcategui/Bloomberg)

This year’s expected tariff shock to prices never arrived. That doesn’t mean consumers—or the Federal Reserve—can breathe easy in 2026.

The last consumer price report for 2025 showed core inflation, excluding volatile items like food and energy, grew 2.6% in the year through November, much lower than the 3% economists expected.

That leaves inflation slightly below where it started in January, despite a torrent of trade levies in April that economists said were sure to slow economic growth and raise prices.

But there’s reason to believe the relief might not last. For one, while inflation hasn’t grown much in 2026, it would likely be even lower were it not for the levies.

Without the tariffs, inflation would have likely declined to about 2.2% this year, said Harvard professor Alberto Cavallo, who helps run the Harvard Business School Pricing Lab. Retailers have begun to pass through their higher costs, but only partially, in part because implementation delays, exemptions, and trade talks have kept firms guessing about where prices will settle.

Companies dodged a bullet when other countries largely declined to impose retaliatory tariffs. Economists worried about the potential tit-for-tat trade measures, but so far countries have opted to negotiate with the U.S. without resorting to their own tariffs.

Another big reason for the muted effect so far is that tariffs never actually hit the levels that the White House said they would in April, when President Donald Trump pointed to a poster board showing a 10% “baseline” tariff rate on most countries along with so-called reciprocal tariffs of up to 50%. Almost immediately after announcing the tariffs, the White House paused them to allow for trade negotiations. While some of the levies have come back, they’ve often been at much lower rates than what was announced.

“The president decided to back off significantly from what he said he would do,” said Erica York, vice president of federal tax policy for the Tax Foundation, a think tank.

Trump’s trade deals have brought in trillions of investment dollars “all while the annualized rate of inflation has slowed,” White House spokesman Kush Desai said. “The Trump administration has consistently maintained that the cost of tariffs will ultimately be borne by the foreign exporters who rely on access to the American economy, the world’s biggest and best consumer market.”

The overall headline tariff rate peaked at 32.8% in April and fell to 27.4% in September, according to a working paper by Harvard professor Gita Gopinath and University of Chicago professor Brent Neiman.

But rather than spike and decline, like the headline rate, the actual rate of tariffs paid has risen gradually from around 5% in March to 14.1% by the end of September, the professors wrote.

Some of the gap comes down to logistics, the authors wrote. Goods that left Asia on a container ship might be subject to the rate of the month they left even if the items weren’t actually imported until months later. Many kinds of goods, like semiconductors, and even some companies that committed to building plants in the U.S. also received exemptions from tariffs, and shipments that complied with the U.S.-Mexico-Canada trade deal also could largely avoid tariffs.

The Supreme Court is expected to rule soon on whether Trump broke the law when he used an emergency powers act to implement most of the levies. If the justices rule the tariff were implemented illegally, White House officials have said they’ll use other authorities to reassemble the tariffs, but in the interim, the uncertainty could keep companies frozen.

“The key finding in our work is that tariff passthrough is gradual, particularly when there is so much uncertainty,” Cavallo said.

Even if a tariff had an August implementation date, a company might choose to pass on its increased costs to buyers slowly to avoid shocking customers. That could mean inflation stays stuck near 3% for a long time rather than an immediate jump.

The uncertainty is a quandary for the Federal Reserve. The central bank is under immense pressure from Trump to lower rates even as inflation remains stuck above its 2% target.

Up until now, firms have used many tactics to avoid raising prices. Some companies raced to import goods between the tariff announcements and implementation, essentially giving them low-cost inventory to sell as they waited out Trump’s trade negotiations. Firms negotiated with foreign vendors to spread out the cost or switched to vendors in lower-tariff countries from China and other countries that faced the highest levies. Many of the country-specific reciprocal tariffs didn’t take effect until August.

But barring further changes, in 2026 companies might either have to raise prices or face squeezed margins.

“Companies that have bragged about eating the tariffs through lower profits can’t do that forever,” said Jessica Riedl, a fellow at the Brookings Institution. Once stock investors start punishing companies for falling margins, “the dam has to break. When one industry leader begins passing the tariffs onto the customers that in turn makes it easier for competitors to do the same.”

On earnings calls in recent weeks, company executives have said they’re beginning to test consumers’ willingness to pay higher prices.

“It was never our intention to fully cover the cost of tariffs here in the second half of 2025. It was too fluid of a situation,” said Richard Westenberger, chief financial officer of kids clothing seller Carter’s on an earnings call. Westenberger said the company plans to raise prices next year in response to tariffs.

Other executives have said they’ve gained confidence to hike prices after seeing competitors raise their own and that consumers by and large are willing to pay them.

“We’ve tried some higher prices. And in Q3, when we saw other retailers take prices up, we tested higher retails in some categories” in limited areas, said Burlington Stores CEO Michael O’Sullivan on the company’s November earnings call. “We saw very little resistance from customers. So going forward, I would say that we will probably get more aggressive.”

Write to Joe Light at joe.light@barrons.com