Over the past couple of months, newswires 
have focused on the potential for elevated tariff rates to feed through into higher inflation and potentially affect output growth as well. Indeed, Chair Powell, in his last post-FOMC meeting press conference 
said, "What looks likely, given the scope and scale of the tariffs, is that…the risks to higher inflation, higher unemployment have increased."
Recent research from economists at the Atlanta Fed suggests that if firms are able to pass through all the costs of tariffs, retail prices would increase significantly―as much as 1.6 percent (depending on how effective tariff rates evolve from here). And even at a 50 percent passthrough rate, the impact on prices would be large enough to be felt in the aggregate (0.8 percent increase in retail prices). How plausible is full passthrough? Going back to the last episode with rising tariffs in 2018, research showed that the cost of the tariffs was almost entirely passed through onto domestic prices.
Rising tariff rates pose threats to the real side of the economy as well. Another highly cited academic paper on tariffs points out that in a simple supply and demand model, "higher prices also reduce demand by domestic consumers."
In this environment, where policy changes lead to sharp increases in costs for many firms, we were curious about how firms would respond, especially in light of a potential reduction in demand that typically accompanies a price hike. So, we turned to the Atlanta Fed's Business Inflation Expectations survey (BIE), a monthly survey of Sixth District firms that is well positioned to ask timely questions on economic conditions facing firms. In gathering information for the April 2025 BIE survey, we asked firms about their ability to pass through increased costs caused by a new economic policy without a resulting reduction in demand.
To that end, we posed two questions to firms about their ability to pass through a hypothetical cost increase to consumers. One of the questions was, "Suppose a new economic policy causes unit costs for your main good or service to increase by [10 or 25] percent, effective immediately. Based on current levels of demand for your main good or service, how much of that cost increase would your firm be able to pass through to customers?" The survey was in fielded from April 7 through April 18, at a time when10 percent was the baseline tariff for almost all countries, and 25 percent was the tariff on all foreign-made autos and auto parts. Some countries or regions, including China and the European Union, had much higher tariffs at the time.
The interesting twist in this line of questioning is the inclusion of the phrase "Based on current levels of demand." The interpretation here is that firms are telling us how much of the cost increase they would be able to pass through to customers before it had a negative impact on demand for that good or service.
Although a diversity of views is apparent, on average firms tell us they expect to be able to pass through 51.1 percent of a 10 percent cost increase, and 47.3 percent of a 25 percent cost increase, without reducing current levels of demand. A closer look at the responses reveals a wide range of expected passthrough rates. Compared to the 2018 episode, where research suggests nearly full passthrough of costs into prices, our results suggest many firms believe their customers are price-sensitive enough this time around (perhaps owing to the recent inflationary surge that isn't too far in the rearview mirror) that they cannot pass through the entire cost increase without reducing demand. A natural next step, then, is to evaluate these responses in the context of firms' perceptions of their current demand.
Figure 2 plots the distribution of firms' passthrough percentages by their strength of sales revenue growth relative to "normal." Viewing this distribution reveals that firms with about normal or above-normal sales levels expect to pass through a much higher percentage of the cost increase compared to those firms with lower-than-normal sales levels. For context, half of firms reported having below-normal sales levels, 38 percent reported about-normal sales levels, and 12 percent reported greater-than-normal sales levels. On average, firms that reported "much less than normal" or "somewhat less than normal" sales levels expect to pass through 45.6 percent of the 10 percent cost increase, firms that report "about normal" sales levels expect to pass through a little more than half of the cost increase, and firms reporting "somewhat" or "much" greater than normal sales expect to pass through nearly two-thirds of a 10 percent cost increase. Results were similar for the 25 percent policy-related cost increase question.
To add further context to these results, we can look at the timeseries behavior of firms' quantitative sales gaps. Figure 3 shows that firms, on average, see sales levels flagging relative to normal, on the order of roughly 8 percentage points in the red. Importantly, at the outset of the trade tensions and tariffs episode of 2018–19, firms perceived their sales levels to be about "normal" (in other words, their quantitative average sales gap was near 0 percent). Given the relationship firms' passthrough rates have to their current levels of demand, we can infer that because perceived demand is weaker now that in the prior period of trade and tariff tensions, firms will be more hesitant to fully pass through tariff-related cost increases.
In sum, firms with about normal or greater-than-normal sales expect to be able to pass through more of the cost increases while maintaining the same levels of demand for their goods or services, as figure 2 shows. And figure 3 shows us that those firms are more likely to be larger firms, due to their smaller sales gap compared to "normal." In the aggregate, business executives see their current sales levels as about 8 percentage points below "normal," which is much weaker than firms' relative position entering 2018. In this environment, firms on average anticipate passing through a little more than half of a 10 percent cost increase without damaging demand. It's not yet clear where the average tariff rate will ultimately settle, or how firms' passthrough rates will evolve from here. However, it does appear that most firms anticipate sacrificing demand should they choose to fully pass a tariff-related cost increase on to customers.
By Kevin Foster, survey director,
Aaron Jalca, economic research analyst, and
Brent Meyer, assistant vice president and economist, all in the Atlanta Fed's Research Department