blue Social Security cards in a stack Impact will be seen on prices, but not before end ofthird quarter. (Photo: Shutterstock)

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The tariffs the Trump administration is imposing onimported goods from China have infused uncertainty in the economyand capital markets, but they haven't resulted in markedinflation.

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Nor is the latest tranche of tariffs expected to spike inflationby the end of the third quarter this year, the period the SocialSecurity Administration uses to assess the Cost of LivingAdjustment for Social Security beneficiaries, according to oneeconomist.

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"The trade war certainly creates some additional uncertainty,but perhaps not as much as one might think," said Eric Gaus, aneconomist with Moody's Analytics, a provider of financialanalytics.

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The impact tariffs have on the cost of goods, and ultimatelyinflation, will likely be manifested after the third quarter, addedGaus. The COLA is based on the year-over-year thirdquarter—July, August, and September–inflation number.

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In April, the SSA forecasted a 1.8 percent COLA for SocialSecurity beneficiaries in 2020.

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A 25 percent tariff on $50 billion of Chinese imports wasimposed in July of 2018. In September, a 10 percent tariff wasplaced on $200 billion worth of Chinese goods, with a scheduledincrease to 25 percent by the end of 2018.

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That increase was delayed as negotiations between the world'stwo largest economies commenced. But talks broke down, and in May,the U.S. raised the 10 percent tariff to 25 percent.

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So far, the tariffs have had a minimal impact on inflation—lessthan 0.1 percent since the initiation of the new levies last July,said Gaus.

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"Before, I might have been swept up in the thinking that theresult on inflation would be worse," he said. "But in hindsight,the numbers make sense. The increases in costs are getting eaten upin the supply chain, so that by the time goods reach consumersthere is very little impact."

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Gaus does caution that the trade war's impact on inflation couldchange, and quickly, just not by the end of the summer.

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"We anticipate the latest increase to 25 percent will have alarger impact, but it will take a while. It took a year for theimpact of the first tranche of tariffs to take effect—the peakimpact was seen about six or seven months later," said Gaus.

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Last year, corporations had the benefits of dramatically reducedtax rates under the Tax Cuts and Jobs Act and an economy that wasstronger than it is now. Large companies, like Apple, were alsoable to nimbly re-source supply chains outside of China.

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"The impact was smoothed over pretty easily," said Gaus. Goingforward, however, there is less "wiggle room" for firms.

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Social Security COLAs are based off the Consumer Price Index forUrban Wage Earners and Clerical Workers, or the CPI-W. Gaus doesnot track the CPI-W, but does track the CPI for Urban Consumers, orthe CPI-U. The two indices are highly correlated, with the CPI-Wtending to come in slightly under the CPI-U by about 0.035percent.

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Moody's Analytics is forecasting a 2.03 increase in the CPI-Uunder its baseline forecast, which assumes that the U.S. and Chinaexit the trade war "gracefully," said Gaus.

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If the trade war continues at its current levels, inflationcould bump up, perhaps adding five basis points, but that would notbe seen until 2020, well after the SSA will announce its COLAincrease in October.

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The wild card that could impact the COLA in the immediate termis what Gaus calls a "trade conflagration." This month, Chinaimplemented new tariffs on $60 billion worth of U.S. imports. TheTrump administration has threatened new 25 percent tariffs on athird tranche of Chinese imports.

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"That's where we would see the impact on inflation quickly anddirectly on consumer goods," said Gaus. "Right now the impact is onintermediate goods. When tariffs are placed directly on consumergoods, you will start seeing an immediate impact on prices."

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An escalating trade war could lead to a 25 basis point increaseto inflation, a scenario that could result in a larger differencebetween the Social Security Administration's projection and therealized COLA, added Gaus.

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President Trump and Chinese president Xi Jinping are scheduledto meet at the G-20 summit in Japan this week. A trade deal is notexpected to be fully brokered, but it is hoped that negotiationscould be reopened, cooling the threat to an immediate escalation inthe tariff war.

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"There's no schedule for tariffs on new goods—it's the club weare holding to bring China to the table and make sure they areacting in good faith," explained Gaus.

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In March of 2019, the average retiree received $1,467.17 inSocial Security benefits, according to the SSA's latest Trustees'report. A 1.8 percent COLA increase would amount to a $26.41monthly raise for retirees.

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Last year's COLA was 2.8 percent. In 2008, the COLA was 5.8percent, the highest in increase since 1982.

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About 64 million Americans will receive over $1 trillion inSocial Security benefits in 2019. Roughly 43.7 millionbeneficiaries are retirees.

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Social Security accounts for 33 percent of income for thecountry's elderly, according to the SSA.

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READ MORE:

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.