Inflation Trends in the US
Consumer prices rose 0.2% in July, keeping the annual inflation rate at 2.7%, according to the latest Consumer Price Index (CPI) data released by the Bureau of Labor Statistics. The core CPI, which excludes food and energy, rose 0.3% from June, bringing the annual rate to 3.1%, the highest in five months.
Impact of Tariffs on Consumer Prices
President Donald Trump’s expansive tariffs are being passed along to consumers, with a broader array of products getting more expensive. However, the impact of tariffs on consumer prices is expected to be a slow boil, with businesses initially absorbing some of the costs. Economists believe that the tariff-driven price hikes will not be a broad-based acceleration in inflation, but rather a one-time lift in prices.
Market Reaction
Stocks were higher on Tuesday, with the Dow rising 480 points, or 1.09%, and the S&P 500 and Nasdaq Composite gaining 0.73% and 0.72%, respectively. The market reaction is likely due to the moderate inflation rate, which is not expected to prompt the Federal Reserve to take drastic measures.
Consumer Price Index (CPI) Breakdown
The CPI report shows that prices rose in various categories, including:
- Commodities excluding food and gas: up 0.2% for the second consecutive month
- Apparel and footwear: up 0.1% in July, with footwear prices rising 1.4%
- Appliances: prices fell 0.9% in July after rising 1.9% in June
- Furniture and bedding: up 0.9% in July
- Outdoor equipment and supplies: up 2.2% in July, the highest in more than two years
- Sporting goods: up 0.4% in July
- Tools, hardware, and supplies: up 1.2% in July
Expert Insights
Economists believe that the pre-tariff stockpiling has mitigated some of the price increases, but this cannot happen indefinitely. The question remains as to where the price increases will show up and who will absorb the costs. According to Oliver Allen, senior US economist at Pantheon Macroeconomics, "I don’t think that necessarily means that it’s over, it’s done, or we’ve seen the peak."
Federal Reserve and Labor Market
The US labor market appears to be on shakier ground than thought, with job gains in July being tepid and revisions to previous months’ data being substantial. The Federal Reserve is expected to take a cautious approach, with a possible insurance cut at its next meeting.
Conclusion
The latest CPI report shows a moderate inflation rate, with some price increases attributed to tariffs. While the impact of tariffs on consumer prices is expected to be a slow boil, economists believe that it will not be a broad-based acceleration in inflation. The Federal Reserve will likely take a cautious approach, and the labor market will continue to be a concern. As Gus Faucher, senior vice president and chief economist at PNC Financial Services Group, said, "The thing to understand is [tariff-induced inflation] is not going to happen with a bang but rather more of a slow deterioration in purchasing power."
