Iran war inflation absorbs $71bn US tariff refunds
A $71 billion wave of U.S. tariff refunds is largely being consumed by rising energy and freight costs tied to the Iran conflict rather than passed on to consumers.
U.S. companies have received roughly $71 billion in tariff refunds after the Supreme Court struck down levies enacted under the International Emergency Economic Powers Act in February. U.S. Customs and Border Protection issued $49.2 billion of those refunds in June alone, representing more than 60 percent of the $166 billion pool. Instead of flowing to the bottom line or reducing shelf prices, much of this capital is immediately offsetting a new surge in commodity and freight costs.
Escalating tensions in the Middle East, particularly the Iran war and its impact on the Strait of Hormuz, have triggered fresh inflationary headwinds. PepsiCo Chief Financial Officer Steve Schmitt said the company will use refunds to manage these costs. “We do expect some more pressure on the business from a commodity standpoint,” Schmitt said. “We will be using the tariff, essentially the refunds, to help offset some commodity inflation that we’re seeing and allow us to continue to play offense in the business.”
McCormick & Company is taking a similar approach, with Chief Financial Officer Marcos Gabriel noting the spice producer will use its $31 million refund to counterbalance higher costs after two price increases over the past year. “I think it’s important to note that the Middle East conflict is really driving more inflation that we had not contemplated before…so we are going to use the majority of the tariff refund to offset these higher costs,” Gabriel said.
Modest disinflationary effect
For markets, the dynamic means the refunds will likely yield a muted impact on official inflation figures. Bank of America Securities analyst Steve Juneau noted that while refunds might blunt further price hikes, direct consumer relief remains unlikely. “Importers that receive refunds will likely use the money to offset rising energy and shipping costs,” Juneau wrote. “They may also offer some type of consumer relief, which surveys suggest is more likely to come in the form of slower price hikes rather than a direct benefit to consumers. Therefore, the refunds could be a modest disinflationary force ahead of midterms.”
Goldman Sachs chief U.S. economist David Mericle warned that if oil spikes above $100 per barrel, monthly core inflation could rise by 3 to 4 basis points in the coming months.
A handful of retailers are bucking the trend. BJ’s Wholesale Club President and CEO Bob Eddy told investors in May that tariff refunds would reduce consumer prices in stores by half a percent. “We will continue to use any source of gain that we can to really bring that value back to our members so that we can build the franchise for the long term,” Eddy said.
Looking ahead, the structural tariff threat is diminishing. Levies under Section 122 of the 1974 Trade Act are set to expire this month, while Section 301 tariffs apply only to specific countries. “Those days, so far, look like they won’t come again,” said Rebecca Homkes of the London Business School, referring to the broad IEEPA tariffs. Still, executives remain wary of a geopolitical landscape where successive shocks continue to erode corporate planning.
