Arunima Sinha, from the U.S. and Global Economics team, discusses
how an upcoming Supreme Court decision could reshape consumer
prices, retail margins and the inflation outlook in 2026.
Read more insights from Morgan Stanley.
----- Transcript -----
Arunima Sinha: Welcome to Thoughts on the
Market. I'm Arunima Sinha from Morgan Stanley's U.S. and Global
Economics Teams.
Today: How a single Supreme Court ruling could change the tariff
math for U.S. consumers.
It's Friday, February 13th at 10am in New York.
The U.S. Supreme Court is deciding whether the U.S. president has
legal authority to impose sweeping tariffs under IEEPA. That
decision could come as soon as next Friday. IEEPA, or the
International Emergency Economic Powers Act, is the legal
backbone for a significant share of today's consumer goods
tariffs. If the Supreme Court limits how it can be used, tariffs
on many everyday items could fall quickly – affecting prices on
the shelf, margins for retailers, and the broader inflation
outlook.
As of now, effective tariff rates on consumer goods are running
about 15 percent, and that's based on late 2025 November data.
And that's quite a bit higher than the roughly 10 percent
average, which we're seeing as tariffs on all goods. In a post
IEEPA scenario, we think that the effective tariff rate on
consumer goods could fall to the mid-11 percent range.
It's not zero, but it is meaningfully lower.
An important caveat is that this is not going to be eliminating
all tariffs. Other trade tools – like Section 232s, which are the
national security tariffs, Section 301s, the tariffs that are
related to unfair trade practices – would remain in place. Autos
and metals, for example, are largely outside the IEEPA
discussion.
The main pressure point we think is consumer goods. IEEPA has
been used for two major sets of tariffs. The fentanyl-related
tariffs on Mexico, Canada, and China, and the so-called
reciprocal tariffs applied broadly across trading partners. And
these often stack on top of the existing tariffs, such as the
MFN, the Most Favored Nation rates, and the section 301 duties on
China that were already existing before 2025.
The exposure is really concentrated in certain categories of
consumer goods. So, for example, in apparel and footwear, about
60 percent of the applied tariffs are IEEPA related. For
furniture and home improvement, it's over 70 percent. For toys,
games, and sporting equipment, it's more than 90 percent. So, if
the IEEPA authority is curtailed, the category level effects
would be meaningful.
There are caveats, of course. The court's decision may not be all
or nothing. And policymakers could turn to alternative
authorities. One example is Section 122, which allows across the
board tariffs for up to 15 percent for 150 days. So, tariffs
could just reappear under different tools. But in the near term,
fully replacing IEEPA-based tariffs on consumer goods may not be
straightforward, especially given ongoing affordability concerns.
So, how does that matter for the real economy? There are two key
channels, prices and margins. On prices we estimate that about 60
percent of the tariff costs are typically passed on to the
consumers over two to three quarters, but it’s not instant.
Margins though could respond faster. If companies get cost relief
before they adjust prices downwards, that creates a temporary
margin tailwind. That could influence hiring, investment and
earnings across retail and consumer supply chains.
Over time, lower tariffs could also reinforce that broader return
to core goods disinflation starting in the second quarter of this
year. And because tariff driven inflation has weighed more
heavily on the middle- and lower-income households, any eventual
price relief could disproportionately benefit those groups.
At the end of the day, this isn't just a legal story. It is a
timing story. If IEEPA authority is curtailed, the arithmetic
shifts pretty quickly. Margins move first, prices follow later,
and the path back to goods disinflation could accelerate. That's
why this is one ruling worth watching before the gavel drops.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share thoughts on the market with
a friend or colleague today.
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