Tariff Passthrough Hits 100% as Reshoring Investment Stalls

Tariffs imposed through November 2025 raised core goods prices by 3.1 percentage points through February 2026, with passthrough to consumers now effectively complete at 100% over five to nine months, according to Federal Reserve analysis released in April. The research settles a critical question for macro positioning: retailers and manufacturers no longer absorb tariff costs — they pass them directly to households, dollar for dollar.

The finding explains the entirety of excess inflation relative to pre-pandemic rates. The Dallas Federal Reserve estimates tariff collections added 0.80 percentage points to 12-month core PCE inflation, which peaked in February 2026. Without tariff effects, core inflation would sit at 2.3% — within the Fed’s target range.

For households, the arithmetic is stark. The Tax Foundation estimates the current tariff regime costs the average US household $1,500 in 2026, or $700 under a scaled-back scenario following the Supreme Court’s February 20 invalidation of IEEPA-based tariffs. The administration replaced those duties with a 10% temporary tariff under Section 122, effective February 24 and set to expire after 150 days unless Congress acts.

Sectoral Divergence Widens

The passthrough mechanics vary by industry, creating clear winners and losers. Yale Budget Lab modeling shows Manufacturing output expanding 1.1% in the long run, while construction contracts 2.5% and mining declines 1.0%. The divergence reflects crowding-out effects: tariff-protected industries draw resources from sectors that rely on now-expensive imported inputs.

Services absorb one-sixth of the total tariff burden indirectly despite facing no direct duties, per the Tax Policy Center. Metals, minerals, chemicals, and appliances used in healthcare, professional services, and government operations drive this indirect passthrough — raising costs even for non-traded sectors.

A Wipfli survey of 300+ industrial leaders in Q1 2026 found margin pressure persisting as customers demand price reductions while tariff and labor costs climb. “Inflation may have eased somewhat, but labor, tariff and operational costs continue to climb. At the same time, customers are pushing for price downs. That tension keeps pressure firmly on margins,” said Cara Walton, Director of Manufacturing Market Intelligence at Wipfli.

Reshoring Investment Paralyzed

The economic rationale for tariffs — encouraging domestic production — has yet to materialise in capital spending. Kearney, a global management consulting firm, found that Trump’s tariffs “didn’t seem to drive significant near-term increases in reshoring or reduce America’s total import dependence.” Imports from China fell $135 billion, but other Asian nations gained $193 billion — Supply Chains shifted from Shenzhen to Hanoi, not to Ohio. The firm’s Reshoring Index remained negative through 2024.

A RELEX survey of 514 supply chain leaders from January 2026 found 51% had already increased consumer prices, but only 18% restructured supply chains or made new investments. The remaining 86% reported tariffs impacted operations but deferred capital decisions. Policy uncertainty — specifically, the unknown duration and scope of tariffs — paralyzes the long-horizon investments needed to justify reshoring.

According to CNBC reporting from April, CEOs are hearing from clients that the speed of tariff landscape shifts prevents major investment commitments. Companies moved to scenario modeling instead of aggressive supply chain shifts, front-loading inventory where possible but avoiding irreversible capex.

Retail Margins Collapse

The federal government collected $29 billion in monthly tariff revenue as of April 2026, according to J.P. Morgan. That revenue came directly from consumer discretionary earnings, which plummeted to pandemic-era lows as retailers struggled to absorb duties. The passthrough is mechanical but not instant: Federal Reserve researchers found that “if retailers’ acquisition costs for a good rise $1 because of tariffs, they charge $1 more for that good seven months later.”

That seven-month lag creates a profit squeeze: retailers pay tariffs immediately but cannot raise prices until customer tolerance builds. By February 2026, the lag closed — passthrough reached 100% — but the damage to balance sheets was done. Consumer discretionary companies reported the worst earnings performance since Q2 2020.

What to Watch

The Section 122 tariff expires 150 days after February 24 — July 23, 2026 — unless Congress acts. Whether the administration extends, escalates, or lets duties lapse will determine whether the current reshoring paralysis breaks or deepens. If tariffs become permanent, capex decisions unlock. If they remain temporary and subject to legal challenge, companies will continue shifting supply chains laterally across Asia rather than investing in US capacity.

Core PCE data through Q2 2026 will show whether the 3.1 percentage point tariff contribution to goods inflation persists or fades as base effects roll off. The Dallas Fed’s counterfactual — 2.3% core inflation without tariffs — provides a baseline for tracking whether the Federal Reserve can cut rates without waiting for tariff policy clarity.

Manufacturing sentiment has surged in early 2026 despite margin pressure, per Wipfli’s survey, driven by expectations of near-term demand recovery. Whether that optimism translates to actual capex or remains speculative depends on policy certainty. The reshoring index will be the hard evidence — and so far, it’s still negative.