How is tariff uncertainty affecting the outlooks of small and medium-sized businesses, and how will this impact consumers?

Boston Fed Research Director Egon Zakrajšek is part of a team at the Bank investigating this critical, ongoing question. He discusses how the team partnered with a survey research firm to reach out to hundreds of businesses for insights. And he shares key takeaways from the team’s findings, including the potential impacts of tariffs on inflation and consumer prices.

Egon Zakrajšek is an executive vice president and the director of research at the Boston Fed. Visit bostonfed.org to find his team’s three Current Policy Perspectives reports on tariffs: “Who Will Pay for Tariffs? Businesses’ Expectations about Costs and Prices,” “Effects of Tariff Uncertainty on the Outlook of Small and Medium-sized Businesses,” and “Small and Medium-sized Businesses’ Expectations Concerning Tariffs, Costs, and Prices.”

For more interviews and analysis of the economy in New England and nationwide, visit BostonFed.org/SixHundredAtlantic.aspx. Subscribe to our email list to stay updated on new episodes.

Amanda Blanco:

Hello, and thank you for joining us on this episode of 600 Atlantic. I'm your host, Amanda Blanco. And today, we're speaking with Egon Zakrajšek, the Boston Fed's director of research. Egon is part of a team of researchers who are investigating a critical, ongoing question: How is uncertainty around tariffs affecting the outlook of businesses, particularly small and medium-sized ones, and how will this impact consumers?

Egon and his team partnered with survey research firm Morning Consult to get answers to these questions. They reached out to hundreds of companies across the U.S. four times between December 2024 and August 2025, and they've published their findings in a series of three reports. So, we're going to talk today about what they found today. Egon, thanks for being with us.

Egon Zakrajšek:

Thank you for having me.

Amanda Blanco:

So, you focused on small and medium-sized businesses, which are companies with 500 or fewer employees. Why look at those businesses in this research instead of larger ones?

Egon Zakrajšek:

So there's a couple of reasons. One reason that many people may not know is that small and medium-sized businesses, firms with fewer than 500 employees, actually account for roughly one half of the total private sector employment in the U.S. So they're very important, they're an engine of growth, they're very important in local communities. Also, from a just economic monitoring perspective, we don't have very, very timely and good data on them.

Large, particularly publicly listed companies, whose stocks are listed on major stock exchanges, they are by regulatory standards required to much more frequently, quarterly, report their financials, their plans and stuff like that, whereas smaller firms do not have those requirements. By the time government data census gets to them, that information is quite stale.

Amanda Blanco:

And what kinds of questions was the team asking businesses in the survey?

Egon Zakrajšek:

So the survey has two parts. One part is a very detailed questionnaire about their plans regarding employment, capital spending, pricing decisions, what has happened in the past, also what they expect for those, and we are collecting those questions, and we have the information.

But the pieces that really focus – that we emphasized in the three Current Policy Perspectives that you mentioned, really focused on the impact of tariffs. So we were asking some special questions and utilizing some of the existing questions to try to elicit information from firms, how will they deal with cost increases, and in particular, how will they pass cost increases, which is something that tariffs do, onto the ultimate prices that they charge their consumers.

Amanda Blanco:

Why is it so critical that we understand how tariffs are affecting these small and medium-sized businesses?

Egon Zakrajšek:

Tariffs are a tax, that's just very, very simply. They're very effective tax, and the tax is paid by businesses, by businesses who import abroad their inputs or final goods, which then they resell to consumers. When the good comes across from a foreign country, in order for that good to be released, you have to write a check to the Customs and Border Patrols. The U.S. government has been raising a significant amount of revenue in tariffs. As of now, over $200 billion have been collected in tariffs from U.S. businesses.

And then, the ultimate very important question then what happens is is that how do the businesses deal with that increase in their costs? So there are some possibilities. Will they pass that cost increase to their final prices? Will they absorb that cost increase in their profit margins? And that has important implications for how the evolution of the economy, for inflation, for employment, things that the Fed, as part of the dual mandate, is very concerned with.

Amanda Blanco:

So, this survey went out four different times, as we said, between last winter, this summer, and each time, it reached about 500 or 600 businesses, which is a pretty big number there. Given that there was a focus on tariffs in the survey, what are a few of the key trends that emerged?

Egon Zakrajšek:

One thing that we were very surprised is just about how much uncertainty about tariffs there was, and partly it reflected the way that the tariff policies have been implemented, things have been announced, but they have been taken back, there's been then emphasis on bilateral negotiations, so that created a lot of uncertainty for firms. So one thing that we were very struck with is that firms really had very little sense of where the tariffs will settle, how large will they be, over what time, how permanent they will be, so that created a sense of general business uncertainty.

The question we were really trying to add, and we were trying to elicit information on, well, how are you going to deal with that cost increase, and particularly how much and over what period do you plan to pass that cost increase into the prices? And what was surprising to us was that the firms really, really emphasized that this process is going to take quite some time, it's going to be potentially several years before the full impact of the tariff-induced cost increases will be reflected in final prices.

Amanda Blanco:

And I'm glad that you mentioned uncertainty, because that was something we wanted to ask you about as well. What do these shifting expectations tell us about how businesses are trying to navigate this uncertain environment?

Egon Zakrajšek:

Uncertainty, it's an important concept in economics, because it affects firms' decision-making. And if you just think about it, if you're a business, and you are planning, let's say, a significant capital expenditure, expanding your business, or you want to hire more workers, uncertainty creates an option value for you to wait, because if the environment is very uncertain, you might not be able to justify making that investments today, because ex-post, the uncertainty may resolve in a way that is not favorable to making that decision.

So in economics, this is what we call a wait-and-see effect, that when you have periods of heightened uncertainty, and in this case, it was very much from the trade policy, as well as some other administration and governmental policies, that created a wait-and-see effect. So, an individual firm may postpone their capital expenditure or hiring, which means that today, we see less spending and less hiring, but then that feeds into the economy, and it could lead to a broader downturn. So that's why uncertainty is very important, and what the survey tried to get was how are firms dealing with this uncertain environment.

Amanda Blanco:

And in your latest report, which was from late September, the team was really focused on who's ultimately going to end up paying for these tariffs. So I believe the brief said that the average tariff rate, which is the percentage imported goods are taxed, it nearly doubled for the businesses affected by the new tariffs, went from about 6.5% in January 2025 to 11.4% in July. That's a pretty big jump, right? How might that impact everyday customers who are buying from these companies?

Egon Zakrajšek:

It is an increase, nearly doubling of the cost of imported goods. And so, as we discussed earlier, in some sense, firms, particularly small and medium-sized businesses, really only have two options. One option is that they absorb that cost increase, that increase from 6% to nearly 12% in their profit margins. They become less profitable, that means they eat it, so to speak. Now, that has adverse impact on the economy. They're less profitable, therefore they will spend less on capital outlays, they will be more reluctant to hire because their costs have gone up. So that's one margin where the firms could adjust, is just to absorb or so-called eat the costs.

The other thing is they could try to pass the increased costs onto their consumers, and that will result in increasing their prices, and if that is happening pervasively across the economy, if all firms are doing that, that would lead to the increase in the average or the general price level, which is what we call inflation. And that increase in inflation, as our listeners know, one of the Fed's mandates, the so-called price stability mandate, is to keep inflation on average around 2%. Since the beginning of this year, we were above inflation when we started the year, we were above the 2% target, but the inflation was very much trending back to the 2%, and we were firmly on the path to return to target. But of course, the tariffs have interrupted the trend, and our inflation has started to inch up again, which complicates monetary policy decisions.

So, for your consumers, for us who go to the store and things like that, we are paying more for those goods, sometimes very directly, it can be passed directly into tariffs, directly in the final goods. But sometimes it's through hidden charges, as firms try to mask the effect of this cost increase through various things, it could be through shrinkflation, the product is of lower quality, smaller. So there's many, many ways the firms are trying to maintain their profit margin in the face of this increase, tariff-induced increase in their costs.

Amanda Blanco:

And this report also said that rough calculations estimate a near-term increase of about 0.75% in core consumer prices due to recent tariffs on directly important goods. What might this mean for people's wallets in the near future?

Egon Zakrajšek:

So core consumer prices, that is a very, very broad basket of goods, that excludes very volatile food and energy components. And essentially, this back of the envelope calculation that we did is saying that that general price level, the tariffs are estimated to increase that price level by 0.75%. So that means your average basket, excluding energy and food prices, will cost 0.75% more roughly this year. So this is what we call first-order effect, this is the impact from direct imports.

Now, of course, many firms import goods, but those goods are then used in productions which are sold in domestic firms. So there's all kinds of linkages between firms through intermediate inputs and stuff like that, so that would lead to the second-round effects. So it's a bit of a lower bound estimate of how likely we think price is to rise.

Amanda Blanco:

And in this debate over the impact of tariffs, it seems like one camp is arguing that tariffs have historically had more of a short-term one-off impact and that nothing will really change over time, but it seems like other people are thinking that the impacts could be a lot more diffuse or spread out over several quarters. Based on what you've seen so far, what can we say about the near and long-term impacts of these tariffs on inflation?

Egon Zakrajšek:

That's right, mechanically, we think tariffs would typically lead to a one-off change in the price level. The easiest way to think about it is suppose the state of Massachusetts increases the sales tax. Well, that sale tax will be reflected once the prices adjust, but then there's no more effect going forward.

Now, it turns out that, yes, there were instances historically where tariffs were also very quickly and a one-off increase in the price level. But what we're seeing now and what the survey results tell us is this process is taking much, much longer. As you mentioned, it's started and it's still unfolding, and based on the expectations of what the firms are telling us, it could go well, well into next year. And part of this reflects that we have, we have lived through a period of rather high inflation, post-pandemic inflation, consumers are quite price-sensitive, firms are finding it very difficult to pass, to have consumers accept those prices. Also, the labor market is cooling, so the people have become a little more conservative, watching their budgets. So firms are trying to find ways to spread that impact over a longer period of time so maybe people do not notice it, do it in other more subtle ways. So definitely, the evidence suggests that this is going to be playing out over a bit of a longer period than we initially anticipated.

Amanda Blanco:

Well thank you for your time Egon, we'll certainly be interested to see how businesses' expectations about the impacts of tariffs evolve, and what they’re going to mean for both businesses and consumers. So, thanks again for speaking with us.

Egon Zakrajšek:

Oh, my pleasure. Thank you.

Amanda Blanco:

You can find more information on everything we discussed today on our website. Check out bostonfed.org/sixhundredatlantic, where you can listen to interviews, as well as our podcast seasons. You can also subscribe to our email list to stay up to date on new episodes. And don't forget to rate, review, share, and subscribe to Six Hundred Atlantic on your favorite podcast app. I'm Amanda Blanco, signing off on another episode of Six Hundred Atlantic. Thanks for listening.