Our experts have noticed increasing signs that costs from US tariffs are being largely absorbed by businesses and end consumers. At the same time, the tip of the inflation iceberg has appeared.
Cautious interest rate decision by the Fed
Our experts have called the recent interest rate cut by the US Federal Reserve (Fed) a calculated decision to accept a greater risk of inflation. Their analysis is based on the central bank's mandate to keep employment high and inflation low. Our team also describe the Fed's move to cut key interest rates by 25 basis points to a target range of 4.00 to 4.25 percent as cautious.
Downward trend in the US labor market
In our analysis of the labor market, the data for September 2025 confirms a downward trend. Only 22,000 new jobs were created in August, while the estimated number of jobs created by March 2025 was revised significantly downward, by almost one million. Though not all indicators are flashing red, discrete deteriorations in the labor market tend to be non-linear: a gradual weakening can very quickly turn into a sudden one.
Inflation rate as a critical factor
When commenting on the interest rate decision, Fed Chair Jerome Powell explained that he was acting on the assumption that the inflation caused by tariffs would likely be short-lived. Therefore, it would carry less weight than usual in determining monetary policy. However, he admitted he could not be certain.
Although the current inflation rate of three per cent is low compared to the double-digit figures of 2022, it has now exceeded the Fed's target of two per cent for 54 consecutive months. An insufficiently restrictive monetary policy is therefore seen as the greatest risk.
Customs costs as a risk factor
Customs duties are an important pressure point for potential future cracks in aggregate figures such as the national unemployment rate or the consumer price index. Increases in import duties, which can be massive, are either absorbed by foreign export companies or passed back to other manufacturers, wholesalers, retailers, and, ultimately, to consumers. Alternatively, they are absorbed in the margins.
The tip of the inflation iceberg
Significant price increases for certain product groups following the introduction of tariffs represent only the tip of the inflation iceberg: audio equipment is +16.3 per cent since March, bedding +6.8 percent, large appliances +5.3 per cent, film and photo accessories +5 per cent, bicycles +4.5 per cent, toys +3.7 per cent, and vehicle spare parts +3 per cent.
For steel and aluminum, which have seen the highest tariffs of +30 per cent since February, data shows a transfer both downstream to other industries in the US and upstream to foreign export companies. Canadian and Chinese exporters are the most affected.
Exporters absorb costs to the greatest extent in the beverage sector. In contrast, the automotive sector is currently a strong example of absorption in the middle of the supply chain: tariffs have risen by 16 per cent, but prices for new cars have remained the same.
Boomerang effect: US companies and consumers under pressure
Overall, there is increasing evidence of tariff costs being transmitted predominantly to the US economy, with some of the burden staying with firms and some reaching the final consumer. However, the transfer process is far from complete. Reasons include delays in the implementation of tariffs, the buffering effect of large inventories, and the sequential approach taken by companies in their tariff management strategy. It is therefore still too early to draw final conclusions on the winners and losers of the trade war.
Swiss franc appreciation due to loss of confidence in the dollar
Regarding the impact on Switzerland, UBS notes in its latest Outlook Switzerland that a loss of confidence in the US dollar has driven capital inflows into the Swiss franc, seen as a safe haven. In 2025, the franc has already appreciated by 10 percent against the dollar.
A deep recession in Switzerland is unlikely
Even before the recent tariff announcements targeting the pharmaceutical sector, UBS estimated that GDP growth could come in around 0.4 percentage points lower over four quarters. A relocation of pharmaceutical production to the US over five years could cost as much as a quarter of the projected growth. However, a deep recession is considered unlikely for the Swiss economy, even in this scenario.
