What Is a Tariff, and How Can It Impact Your Personal Spending?

Tariffs. You’ve likely heard the word getting thrown around in the news recently. But what does the term mean, and how do they affect coffee prices or larger purchases like a new vehicle? Below, we break them down and give you the insights to prepare for the holiday shopping season. 

What is a tariff?

A tariff is essentially a tax imposed by a government on imported goods. When products cross international borders, the importing country may charge a fee to the exporter. This fee is typically calculated as a percentage of the product’s value or as a fixed amount per unit. 

Tariffs serve multiple purposes. They can:

• Protect domestic industries from foreign competition¹
• Generate revenue for the government¹
• Be used as a tool in international negotiations

How tariffs impact prices

Tariffs applied to imported goods and materials increase their costs. Importers often pass these additional costs on to the companies importing them. These companies can then either absorb the added cost or pass it on to consumers in the form of higher prices.² As a heavily imported product, coffee prices have spiked nearly 21% over the past 12 months.³ The price of motor vehicles is also expected to increase 12% in the short-run, leaving buyers on the hook for an additional $5.7k compared to 2024 new car prices.⁴

The holiday shopping season won’t be immune to the effects of tariffs, either. Research from Goldman Sachs indicates that consumers felt a fifth of their impact as of July—but will feel two-thirds of their impact by October , just in time for holiday shopping.⁵ Around 40% of consumers are concerned that prices will be higher this year, and are hitting checkout lines early in hopes of snagging wish list items for less.⁶ 

Prices are expected to increase in popular holiday gifting categories like apparel, electronics, and toys.^4,7 But where you see tariffs showing up may differ from one retailer to the next. Some have introduced “processing” or “importing” fees during the checkout process, allowing them to keep ticket prices low while still recouping some of their importing costs.⁸ Other retailers are simply offering less significant deals or discounts than in past years.⁵ 

Where does tariff money go?  

Money from tariffs goes to a general fund managed by the U.S. Department of Treasury. While these funds are not earmarked for a specific purpose, they may be used to reduce federal deficits or fund infrastructure projects.

The broader picture

Tariffs can lead to retaliatory measures from other countries.² If the U.S. imposes tariffs on goods from another nation, that nation might respond by imposing tariffs on American exports. This back-and-forth can escalate into trade wars, which can further affect consumer prices.

While tariffs can protect domestic industries and jobs, they can also lead to higher prices for consumers.² Policymakers often face the challenge of balancing these competing interests. For consumers, understanding the role of tariffs can help make sense of price fluctuations and the broader economic landscape.

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