Guest Article: Do Americans Really Pay 96% of the Tariffs?

We are delighted to share, with permission, the following article from highly esteemed economist Daniel Lacalle, PhD.1

Daniel Lacalle

January 24, 2026

The Congressional Budget Office has revised its estimates and states that the tariff increases implemented from January 6, 2025, to November 15, 2025, will reduce the primary deficit of the United States by $2.5 trillion over 11 years if they remain in place during the 2025–2035 period. Tariff revenues have risen to $90 billion between October and December 2025, compared with $20 billion in the same period in 2024. However, year-over-year inflation during that period is actually lower.

Inflation in the United States has not surged to 5–6%, as some investment banks had predicted following the tariff announcements. In fact, the year-over-year CPI, the PCE Index, and import prices reported by customs and border offices show no discernible increase in year-over-year inflation and are certainly very far away from the consensus estimates.

The year-over-year CPI in the U.S. stood at 2.7% in December, with a monthly increase of 0.3%, according to the latest data from the Bureau of Labor Statistics. The main drivers of inflation are housing and services, which have nothing to do with tariffs. Core inflation (CPI excluding food and energy) stood at 2.6% year-over-year in December, with a monthly advance of only 0.2%, the lowest level in about four years. Core inflation has stabilized around 2.6%, well below what was feared a few months ago, reinforcing the perception that underlying pressures are moderating even though services remain relatively “hot.”

The U.S. import price index rose 0.4% in the September–November 2025 period, with a 0.7% year-over-year increase for non-energy imports. Within imports, prices from China fell 3.6% year-over-year in November, while those from Japan rose 2.6% and those from the EU fell 0.1%. Customs import prices are falling, especially from countries facing higher tariffs.

Moreover, U.S. export prices increased 0.5% in the September–November 2025 period, especially in agricultural goods and motor vehicles.

According to the BLS, import prices rose only 0.1% in the twelve months ending in November, while export prices increased 3.3%. Since these figures exclude tariffs, they show that inflationary pressures are not coming from imported products nor tariffs.

If both import and export prices rise but import prices barely move, the effect of the tariffs is being absorbed throughout the supply chain, particularly in locations with the greatest excess capacity. In other words, exporters, distributors, transportation, and warehousing absorb most of the tariffs in the chain because the cost of working capital for elements of the chain with greater excess capacity makes passing tariffs on to the consumer unfeasible.

Despite this, you will read studies by Cavallo or the Kiel Institute that claim the opposite. Alberto Cavallo’s estimates use January 2024 as the cutoff for the pre-tariff trend calculation. However, after a brutal inflationary burst in 2021–2024, the last year appears artificially “disinflationary.” If one looks at the 2021–2024 series, the trend is of continued disinflation. The inflation trend in 2025 is lower than in the Biden years, even in the eighteen months that led to Fed easing and rate cuts.

The Federal Reserve Bank of Atlanta published that businesses anticipate their costs will rise just 2.0 percent over the next year, down from 2.2 percent in December, the lowest level in the post-pandemic era.

The Kiel Institute study “America’s own goal: Americans pay almost entirely for Trump’s tariffs” is statistically questionable for several technical and identification reasons. Economists like Stephen Moore and E.J. Antoni have pointed out some surprising assumptions, and John Carney wrote extensively about major statistical biases in “Debunking the myth that Americans are paying 96% of tariffs,” concluding, “It does not prove 96 percent of costs fall on Americans. It does not prove consumers pay higher prices. And it certainly doesn’t prove tariffs are an “own goal.”

The most surprising factor is that the Kiel Institute attributes almost the entire price movement trend in the United States to tariffs while ignoring that the same trend is similar or even larger in the United Kingdom, European Union countries like Spain, or Japan. If U.S. exporters raise prices up to three times faster for the same categories than those exporting to the United States, the explanatory factor of price moves in America is not tariffs and has much more to do with other factors, as well as the widespread deterioration in the purchasing power of currencies in the countries analyzed.

The key result behind the headline circulating in the media—that exporters absorb 4% and the U.S. absorbs 96% of tariffs—is based on a coefficient of approximately −0.039 with a standard error of 0.024, which is only significant at the 10% level, showing a very noisy estimate despite having 25.6 million observations, Carney explains. With that level of imprecision, the implicit confidence interval itself allows for exporter absorption between 0% and 9%, so presenting “4%” as a precise figure creates an illusion of accuracy that the data do not support. Furthermore, the study interprets the increase in average imported prices as evidence of tariff pass-through but ignores that total imports (value and volume) fall by 28%, with low-cost suppliers exiting the market. If cheap products disappear and only mid/high-end ones stay, the average price rises even though the reality shows that prices within each category have not increased, as reflected in customs and final consumer data. Thus, the change in the quality mix can be mistaken for a price increase “due to tariffs.”

Tariffs are applied at very disaggregated levels (HS8/HS10), but surprisingly the Kiel study works with data at the HS6 level, which is much more aggregated, according to Carney. This forces the use of an average tariff rate for products with very different actual tariffs or even no tariffs at all. That poor measurement of the tariff (as an explanatory variable) introduces an error that biases coefficients toward zero, making it easier to “find” a little price response and reinterpret it as proof that almost all the cost falls on the U.S. If the same analysis is done for non-energy products in the United Kingdom, Japan, Germany, Spain, or France, for example, it would appear that tariffs are being paid by Americans and all foreigners at the same time, which is obviously ludicrous. If both tariffed and non-tariffed goods show increases in unit values, the differential comparison is artificially reduced.

Even if the estimates on import prices were correct, the study assumes without evidence that 96% is passed on to consumers, without analyzing retail prices, business margins, or the distribution of incidence along the supply chain.

The claim that it is basically a “consumption tax” passed on 96% to Americans is presented as an empirical conclusion, when in reality it is a personal extrapolation without direct statistical backing, Carney concludes.

If the report’s conclusions—based on several surprising assumptions—were correct, then year-over-year inflation, core inflation, and the U.S. PCE Index would have more than doubled the published levels. The PCE Index would have more than doubled the published levels. The study assumes that all price increases are explained by tariffs, primarily by ignoring the upward trend in individual prices and baskets in exporting countries as irrelevant. If US export prices rise three times faster than import prices, and higher if analyzed category by category, it is clear that exporters to the US are not passing tariffs to final prices. When import prices from the EU fall, and China’s prices decline is so significant, it is also a signal of easing inflationary pressure, not the opposite.

Moreover, by ignoring the fact that the most “inflationary” categories in U.S. data are services, which are not subject to tariff pressure, the analysis reaches conclusions that are surprising and raise more doubts than certainties. The data shows that services, which are not affected by tariff pressure, are the most “inflationary” categories in the U.S., leading to conclusions that are surprising and create more doubts than certainties. Furthermore, we should see rising margins and lower prices among exporters selling to the U.S., but the opposite has occurred.

Even in the Kiel Institute report, they say that exporters largely kept pre‑tariff dollar prices, which is a reduction in constant dollar terms considering that the US dollar weakened in 2025 against exporter currencies. Furthermore, the study says that their per‑unit margins in the US did not rise and they accepted lower volumes and lost market share. If Americans have consumed more, as the data indicates, and prices have not gone up in constant dollars, while exporters have lost market share and their profits haven’t improved, the report is recognizing that price changes can’t be blamed on tariffs but rather on many other factors in a complicated trading situation.

Tariffs will remain a fascinating topic of debate for a long time, and studies are always valuable, but the evidence—almost a year later—is that the components of inflation data do not show slowing but persistent inflation (a phenomenon occurring in all comparable countries) to be caused by tariffs. With the level of excess capacity that exists in the global exporting system, it is clear that the supply chain absorbs tariff costs wherever pricing power is weakest.

1Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

December Market Chartbook

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December Market Review: Historic Gains Despite Tariffs and Turbulence in 2025

January 2, 2026

Sean Gross, CFP®, AIF® | Co-Founder & CEO 

Despite numerous significant events throughout the year, 2025 proved to be an exceptionally strong period for financial markets. Investors navigated through tariff policy shifts in April, continuous advancements in artificial intelligence technology, the enactment of the One Big Beautiful Bill Act, and various other developments. Throughout these challenges, U.S. equities reached unprecedented levels, international markets delivered superior performance, and fixed income securities extended their recovery. The S&P 500 has now posted returns exceeding 10% in six out of the last seven years and has approximately doubled since reaching its trough in 2022.

The previous year demonstrates that maintaining discipline and concentrating on long-term objectives represents the most effective approach to managing uncertainty.

 2025 Market and Economic Highlights

• Including dividends, the S&P 500 advanced 17.9% during 2025, recording 39 fresh record peaks. The Dow Jones Industrial Average climbed 14.9% while the Nasdaq delivered a 21.2% return.
• The VIX, which gauges equity market volatility, concluded at 14.95 and remains modest relative to historical levels, despite spiking to 52.33 during April.
• The Bloomberg U.S. Aggregate Bond Index advanced 7.3%, marking its strongest annual performance since 2020. The 10-year Treasury yield declined to 4.17% by year-end from 4.57% at year-start.
• Based on the MSCI EAFE Index and MSCI EM Index respectively, international developed markets and emerging markets each rose more than 30% when measured in U.S. dollar terms.
• The U.S. dollar index closed at 98.32, dropping 9.3% from its 108.49 opening level. The dollar touched a low point of 96.63 in September.
• Bitcoin declined approximately 6.5% from $93,714 to $87,647, following a peak of $125,260 in October.
• Gold prices surged throughout the year, ending at $4,341 per ounce for a 64% increase. Silver prices similarly climbed to $70.60 per ounce from $29.24 at year-start.

Significant developments throughout 2025

Numerous developments during the past year fell into the category of "known unknowns." Former Secretary of Defense Donald Rumsfeld popularized this concept by differentiating "known unknowns" from "unknown unknowns." For investors, this framework proves valuable since the former represents uncertainties that can be anticipated. When markets respond to such events, investors can prepare beforehand and avoid unexpected disruptions.

Tariff-related concerns, for example, were clearly on investors' radar screens before April 2. Though this awareness didn't prevent market reactions given the magnitude of these trade measures, it enabled markets to recover swiftly once developments unfolded. Investors also anticipated Federal Reserve rate adjustments following labor market softening. Many likewise expected passage of new tax legislation given Republican control of both congressional chambers.

Even AI-related concerns, which represent perhaps the most significant market uncertainty currently, have remained prominent in investor thinking. While the DeepSeek development in January—when a Chinese AI firm demonstrated that models could be developed and operated more economically—caught markets off guard, the similarities to the dot-com era and previous episodes of elevated capital spending by major corporations are widely recognized.

The following represents a summary of the top 10 market-moving developments throughout the year: 

• January 20: President Trump takes office. 
• January 21: Announcement of the $500 billion private-sector Stargate project. 
• January 27: AI-related equities decline following DeepSeek announcement. 
• April 2 to 9: "Liberation Day" tariff declaration triggers a market correction. A subsequent 90-day suspension sparked a recovery. 
• July 4: The "One Big Beautiful Bill Act" becomes law, continuing numerous Tax Cuts and Jobs Act provisions.
• September 17: The Fed initiates a new rate-cutting cycle. 
• September 22: Nvidia and OpenAI unveil a significant strategic partnership and investment, generating concerns about "circular deals." 
• October 1: The government enters what becomes a record 43-day shutdown. 
• October 14: Jamie Dimon cautions about "cockroaches" following Tricolor and First Brands bankruptcies. 
• December 16: The BEA reports the unemployment rate reached a four-year peak of 4.6% in November. 

Three primary themes characterized the yearWhich themes influenced markets throughout these developments?

First, artificial intelligence clearly dominated market discussion during 2025. From substantial infrastructure commitments to worries regarding market concentration, AI emerged as a significant driver of economic expansion and market performance. The Magnificent 7 stocks now constitute approximately one-third of the S&P 500, establishing concentration risk that ensures most investors maintain exposure to these equities whether intentionally or not. Acknowledging this factor when developing investment strategies and financial plans will become increasingly critical.

Second, tariff policy generated uncertainty but produced less economic disruption than anticipated. While levies on imported goods increased substantially for numerous trading partners, the feared economic ramifications largely did not occur. This resulted from corporate adaptation, tariff suspensions or reductions, and sustained consumer spending. For investors, this illustrates that policy changes in Washington—whether involving trade or federal finances—do not always produce obvious effects on the economy or markets.

Third, numerous asset classes delivered strong performance during 2025. International equities outperformed U.S. markets, partly due to U.S. dollar weakness. Fixed income securities produced solid returns and have substantially recovered their 2022 losses. Additional individual assets including gold also achieved record performance. Therefore, capturing gains from these asset classes depends less on selecting individual investments and more on maintaining appropriate asset allocation that can capitalize on opportunities while controlling risk exposures.

The bottom line? 2025 represented a successful year for investors. While strong market performance merits recognition, it reinforces the critical importance of maintaining investment discipline. Investors should carry forward this principle as they develop their investment and financial plans for the year ahead.

November Market Chartbook

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November Market Review: Navigating Volatility and Economic Uncertainty

Sean Gross, CFP®, AIF® | Co-Founder & CEO

November brought a temporary surge in market volatility that rippled across numerous asset classes. Despite solid year-to-date gains in stocks, bonds, and international markets, concerns about artificial intelligence stocks and Federal Reserve policy direction weighed on investor sentiment. The government shutdown further complicated the economic picture by postponing critical data releases, making it harder to assess the economy's health.

Many asset classes recovered and stabilized as the month concluded. This pattern reinforces a crucial lesson for long-term investors: maintaining a flexible, well-balanced portfolio designed to weather market fluctuations is essential. Achieving investment success means keeping sight of long-term objectives rather than responding to headlines or pursuing short-term trends.

What factors influenced November's market movements, and how should investors approach the final weeks of the year?

November's Primary Market and Economic Developments

• The S&P 500 edged up 0.1% for November, while the Dow Jones Industrial Average added 0.3% and the Nasdaq slipped 1.5%. Through year-end, the S&P 500 has advanced 16.4%, the Dow has climbed 12.2%, and the Nasdaq has surged 21.0%.
• The VIX, which measures stock market volatility, closed at 16.35 after spiking to 26.42 during the month.
• The Bloomberg U.S. Aggregate Bond Index increased 0.6% in November and has delivered 7.5% returns year-to-date. The 10-year Treasury yield concluded November at 4.02%, temporarily dipping below the 4% threshold.
• International developed markets, measured by the MSCI EAFE Index, rose 0.5% in U.S. dollar terms, while emerging markets declined 2.5% according to the MSCI EM Index. For the year, the MSCI EAFE Index has returned 24.3% and the MSCI EM Index 27.1%.
• The U.S. dollar index finished at 99.46, briefly exceeding the 100 mark.
• Bitcoin dropped approximately 17% during November, closing at $91,176.
• Gold prices finished higher at $4,218, though remaining below October's record peak of $4,336.
• The delayed September employment report revealed 119,000 new jobs were created, while the unemployment rate increased to 4.4%. No October jobs report will be released.

A temporary shift away from risk assets

November witnessed a temporary retreat from risk assets including technology stocks, high-yield bonds, cryptocurrencies, and similar investments. Questions about the viability of AI-related investments and recalibrated expectations for Federal Reserve rate cuts drove this shift. The S&P 500 has experienced six pullbacks of 5% or more this year, the highest count since 2022 though still aligned with historical norms. Several major asset classes recovered in the month's closing days, pushing the S&P 500 into positive territory.

AI-focused technology stocks posted their weakest week since April during the month. Volatility emerged from concerns about spending levels, debt burdens, profit margins, and potential bubble risks. However, underlying fundamentals remained solid, with companies like Nvidia delivering robust third-quarter revenue and earnings growth. Several stocks, including members of the Magnificent 7, rallied following these earnings announcements.

Cryptocurrencies underwent a sharp correction during this risk-averse period. Bitcoin tumbled more than 30% from its early October peak above $125,000, briefly trading below $85,000 and erasing year-to-date gains. While cryptocurrency adoption has expanded among investors, such episodes highlight that these assets can be highly speculative and subject to dramatic swings. Maintaining proper asset allocation and implementing ongoing risk management remain critical considerations.

Bond markets advanced in November, supported by declining long-term interest rates as the 10-year Treasury yield temporarily fell below 4% again. This movement reflected revised expectations about government policy that could lead to lower rates over time. The Bloomberg U.S. Aggregate Bond Index has posted a 7.5% year-to-date gain, its strongest performance since 2020, helping to provide stability to diversified portfolios.

Government shutdown concludes amid lingering economic questions

The historic 43-day government shutdown came to an end, though federal funding only extends through January 2026. This timeline means political uncertainty will resurface in just a few months. Despite these challenges, markets generally looked past the shutdown, even as the absence of economic data created additional complications.

The Bureau of Labor Statistics published the delayed September employment report, originally scheduled for October release. Job creation that month surpassed forecasts, bouncing back from summer weakness. However, revised data revealed a loss of 4,000 jobs in August, marking the second month of negative employment growth this year. The unemployment rate climbed to 4.4% in September, its highest reading since October 2021, though this remains relatively low historically.

A complete October employment report will not be issued since household and business surveys were not conducted that month, though some data will appear with November's report on a delayed schedule.

Federal Reserve rate cut expectations have evolved

These data gaps mean the Federal Reserve will approach its mid-December meeting with an incomplete economic assessment. Market expectations for a rate reduction at the upcoming meeting have fluctuated significantly, with probabilities falling in mid-November before recovering. Current market-based projections suggest the Fed will implement a rate cut in December, followed by additional cuts in April or June 2026.

Additional economic indicators, including consumer confidence measures, have also deteriorated. The University of Michigan's Index of Consumer Sentiment preliminary reading fell from 53.6 to 50.3 in November. This decline reflects ongoing worries among Americans regarding employment prospects, elevated prices, and their overall financial well-being. While many households face financial pressure, weak sentiment in recent years has not resulted in decreased spending or reduced corporate revenues.

The bottom line? November's market fluctuations and persistent economic uncertainty serve as reminders that stock market volatility is a normal occurrence. Investors should maintain perspective as the year draws to a close.