Inflation Update
The Bureau of Labor Statistics reported that inflation held steady at 2.7% for the year ending in July, according to the consumer price index. This suggests that the price pressures from tariffs were not as strong as initially feared. Forecasters had expected inflation to rise for the third consecutive month to 2.8%.
Signs of Underlying Inflationary Pressure
Despite the steady inflation rate, the report revealed some signs of underlying inflationary pressure. Core inflation, which excludes food and energy prices, rose to 3.1%, higher than expected. This represents a two-tenths of a percentage point increase. For the month of July, core prices were up 0.3%, the largest monthly increase so far this year. According to Bankrate chief financial analyst Greg McBride, "This could be the calm before the storm," as a slew of tariffs are taking effect this month, which may lead to higher costs for consumers in the remainder of 2025.
Factors Contributing to Inflation
Rising shelter costs significantly contributed to inflation in July. Prices for core goods, the category most reflective of tariff costs, increased at a moderate pace of 0.2%. The mixed inflation picture for July is likely to allay fears that President Donald Trump’s tariffs are pushing up prices. However, it also adds to expectations that the Federal Reserve will cut its interest rate target in the second half of the year to prevent the economy from slowing.
Tariffs and Their Impact on the Economy
The effects of tariffs are a major question mark looming over the U.S. macroeconomy. Higher tariffs have taken effect for many countries around the world, and tariffs on imports such as copper and automobiles have also been implemented in recent months. If tariffs push up prices, it would also bring inflation further from the Fed’s target of 2%. Some economists, including Christopher Waller, a member of the Fed’s board of governors, argue that tariffs would only have a one-time effect on prices and are not likely to lead to durable inflation.
Interest Rates and the Federal Reserve
The Fed has maintained an interest rate that would otherwise seem high, given the slowdown in some interest rate-sensitive sectors, such as homebuilding, and the pullback in hiring indicated by some labor market indicators. However, some economists see a limited inflation threat from tariffs. At the July monetary policy meeting, Chairman Jerome Powell stated that it was "reasonable" that tariffs might not have a lasting impact on inflation, but also acknowledged that the inflationary effects could be more persistent.
Pressure on the Federal Reserve
Powell has been under enormous pressure from Trump to lower rates, with Trump taking to social media to criticize him. Trump has reportedly discussed options for replacing Powell, but appears to have backed off the threat to fire him. The economy appears to be in strong shape, with a low unemployment rate of 4.2% and a gross domestic product growth rate of 3% in the second quarter, assuaging recession fears.
Conclusion
In conclusion, the steady inflation rate and signs of underlying inflationary pressure suggest that the economy is experiencing a complex inflation picture. The effects of tariffs and their impact on prices will continue to be a major focus for the Federal Reserve and economists. As the economy continues to grow, the Fed will need to balance the risks of inflation and recession to maintain a stable economy. With the unemployment rate low and GDP growth strong, the economy appears to be in good shape, but rising prices remain a threat to economic sentiment and Trump’s approval ratings.
