Pass-through of tariffs to retail prices

This paper investigates the dynamic pass-through of tariff changes to 115 item-level retail prices in the USA using a monthly dataset spanning three decades (1995–2025). We address the econometric challenge of Nickell bias in long-horizon impulse response estimation by employing a bias-corrected split-panel jackknife estimator within a local projection framework. The identification strategy leverages item-specific tariff variation within a two-way fixed effects structure that absorbs common time-varying macroeconomic shocks, such as aggregate inflation and business cycles, while strictly controlling for unobserved time-invariant item heterogeneity. The results reveal a distinct reversal: tariff shocks are highly inflationary initially, but exhibit a statistically significant reversal in the long run, consistent with general equilibrium adjustments. While pass-through was negligible prior to 2010, the post-2010 era, characterized by broad-based protectionism, exhibits a high-magnitude initial transmission of tariffs to consumer prices, though long-run persistence remains statistically uncertain. We also uncover critical state-dependent asymmetries, as large tariff shocks induce more sustained price adjustments than small fluctuations. These findings suggest that the inflationary costs of modern trade wars are more structurally embedded than previously understood and that standard fixed-effects estimators significantly underestimate the long-run persistence of trade policy shocks.