Commentators usually don’t get gifts like the one I received in yesterday’s Bloomberg.com report on the latest developments in the continuing Will-He-Won’t-He drama concerning President Biden’s upcoming decision on cutting or eliminating some tariffs on U.S. imports from China in order to ease raging inflation.
As I’ve repeatedly emphasized (most recently in print, here), to anyone who knows anything about business, the idea that tariff levels and consumer prices have much to do with each other is nonsensical. The reason? It assumes that businesses base what they charge their customers on the costs they pay for the goods and services for whatever they’re trying to sell.
But actually, the predominant driver of their selling prices, at least over any significant period of time, is the level of demand for their products or services. If it remains strong, businesses will keep raising their selling prices as high as they can regardless of what their input costs are. That’s a great way to increase profits. And if they want to keep growing these profits (and what business doesn’t?), they’ll keep raising these prices as long as customers will pay them – as long as that demand stays strong.
When do businesses lower selling prices? For those that want to maximize profits (and what business doesn’t?), only when demand for their products and services weaken – that is, when customers decide for whatever reason that these prices have risen too high.
So there is absolutely no reason to believe that lower prices for inputs from China independent of demand will cause businesses to lower the prices they charge their customers, and thus help bring inflation rates down. Instead, they’ll just pocket the new profits. And according to the aforementioned Bloomberg piece, we just got confirmation from the horse’s mouth – businesses themselves.
Reported the Bloomberg correspondents:
“The White House has asked retail companies for a commitment to lower prices following any duty reductions but executives rebuffed that request and told US officials it was an unrealistic expectation,” said “people familiar with the deliberations, who asked not to be identified.”
And apparently there are no plans to seek public price-reduction commitments from sectors of the economy that receive any tariff relief. Maybe because at least some administration officials finally recognize how ludicrous the tariff-inflation connection has always been?
But even as the Bloomberg reporters gave me this gift on the subject, I made a goof. During my latest radio interview on the subject on “CBS Eye on the World with John Batchelor,” I spazzed out and several times referred to businesses never cutting their “costs” when their input costs fell. I hope that most listeners understood that I was trying to say that they never cut their selling prices, but the record needs to be set straight. Here’s a link to the podcast, and apologies for any confusion.