Tariffs Could Sting in 2026: Will Trump Back Down Again?
The US economy may face a challenging year ahead as President Donald Trump's tariffs could significantly impact the cost of living for Americans. While the tariffs didn't dramatically raise prices in 2025, they are expected to have a more noticeable effect in 2026.
In 2025, the United States collected a staggering $187 billion more in tariff revenue compared to 2024, marking a nearly 200% increase. Businesses bore the brunt of this, covering around 80% of the tariff bill. However, this situation is changing as companies start to pass these costs on to consumers.
According to JPMorgan, the 80% contribution from businesses could drop to a mere 20% later this year. Kyle Peacock, a principal at Peacock Tariff Consulting, notes that many businesses are now forced to increase prices, with some doing so immediately at the start of the new year, while others plan to wait until the first or second quarter.
Items with low profit margins, such as groceries, are likely to be among the first to see price hikes in 2026. This presents President Trump with a difficult decision ahead of the midterm elections: to continue his tariff strategy or provide some relief to Americans struggling with the rising cost of living.
Trump has a history of reversing his tariff threats, often referred to as 'TACO' (Trump Always Chickens Out) on Wall Street. In the new year, he delayed massive tariffs on furniture, cabinets, and Italian pasta, suggesting that he may seek opportunities to quietly back down from other tariffs in 2026 to avoid further alienating voters.
Businesses had built up massive inventory stockpiles in the early part of 2025 to prepare for future tariff increases, which reached a staggering 145% for goods from China. As these stockpiles deplete, businesses must now purchase goods with the higher tariffs, and they can only absorb these costs for so long.
To remain competitive, businesses of all sizes will likely not increase prices by the full amount of the tariffs they pay on imported goods, according to Peacock. With inflation already taking a significant bite out of people's paychecks, which have been growing much slower than in recent years, businesses have limited leverage to raise prices further.
The extent of price increases in 2026 will depend on the category and product being purchased. Grocers, for instance, typically operate with thin profit margins, giving them less ability to absorb tariffs. Goldman Sachs economists estimate that tariffs contributed to a half-percentage-point increase in inflation in 2025, aligning with Federal Reserve Chair Jerome Powell's statement that Trump's tariffs were responsible for the entire rise in inflation above the central bank's 2% target.
A significant 'X' factor that could prevent prices from rising as high as expected this year is a landmark Supreme Court case that could invalidate Trump's most sweeping tariffs. As of December 14, the tariffs being challenged have generated $130 billion in revenue, according to US Customs and Border Protection data.
If the Supreme Court rules against the Trump administration, it could result in businesses receiving refunds on the tariffs they've already paid. This would limit Trump's ability to impose higher tariffs without restrictions, as he has done throughout his second term.
Peacock suggests that many businesses' pricing decisions for the coming year will depend on the Supreme Court's verdict, which is expected in the coming weeks. However, Trump and his administration have hinted at further tariffs if the Supreme Court rules against them.
On the other hand, with affordability concerns at the forefront, Trump's popularity is eroding. He has recently backed off various higher tariffs that were set to take effect or had been proposed, including those on produce, furniture, cabinets, and pasta. Trump's history of backing down from tariff threats, as seen on 'Liberation Day' in April, suggests that he may reconsider his approach to tariffs to address the high cost of living he was elected to address.
