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| consumer prices likely increased moderately in May amid relatively cheaper gasoline. Photo: Bloomberg |
The U.S. inflation rate remained unchanged in July, holding at 2.7% year-over-year and coming in slightly cooler than economists’ expectations of 2.8%. While this marks a sign of stability, it still leaves inflation elevated compared to the Federal Reserve’s 2% target. The monthly consumer price index (CPI) rose 0.2%, in line with forecasts and below June’s 0.3% increase, offering some reassurance that price growth is not accelerating despite the recent rollout of new trade tariffs.
Core CPI which strips out volatile food and energy categories painted a more complicated picture. It climbed 3.1% over the past year, above both the 3.0% forecast and June’s 2.9% rate, making it the highest core reading since February. On a monthly basis, core inflation rose 0.3%, matching expectations but coming in higher than June’s 0.2%. This persistence in core price pressures, especially in shelter and certain goods, underscores the challenge facing the Fed as it balances economic support with inflation control.
Tariffs Begin to Register But Full Impact Still Unclear
July’s data came as a wave of new tariffs took effect in early August on copper products and imports from dozens of countries, adding to an expanding roster of trade barriers imposed during Donald Trump’s second term. On Monday, Trump extended the pause on higher tariffs for Chinese goods until November, a move that delays but does not remove the risk of further inflationary pressure.
Jed Kolko, senior fellow at the Peterson Institute for International Economics, noted on X that any inflationary impact from tariffs is likely to appear first in core goods prices, which were up 0.2% in July the same as June and running higher than in the spring months of March through May, though still at a modest pace.
The shelter index remained the single largest contributor to monthly CPI growth, rising 0.2% for the second straight month. Shelter costs are now up 3.7% over the past year, showing a gradual cooling trend but still exerting upward pressure on overall inflation.
Food prices provided a reprieve, holding flat in July after two consecutive 0.3% monthly gains. Over the year, the food index rose 2.9%, down slightly from June’s 3% pace. Gas prices offered even more relief, falling 2.2% for the month and plunging 9.5% from a year earlier a steeper annual drop than June’s 8.3% decline.
Fed Stays Patient But Markets Expect a September Cut
Federal Reserve Chair Jerome Powell acknowledged that higher tariffs have begun to filter into certain goods prices but said their overall economic and inflationary impact remains uncertain. “Higher tariffs have begun to show through more clearly to prices of some goods, but their overall effects on economic activity and inflation remain to be seen,” Powell said during a July 30 press conference, following the Fed’s decision to hold interest rates steady for the fifth consecutive meeting.
The Fed’s next policy decision is set for September, a meeting widely viewed as the most likely point for the first rate cut of the year. That expectation has been bolstered by July’s cooler-than-expected headline CPI and a weaker jobs report earlier this month, which showed softer job gains for May and June after downward revisions. According to the CME FedWatch Tool, the probability of a September rate cut jumped to 90% after the inflation report, up from around 80% beforehand.
Seema Shah, chief global strategist at Principal Asset Management, said the data is not strong enough to derail a cut. “Although core annual inflation is back to its highest level since February, today’s CPI print is not hot enough to derail the Fed from cutting rates in September. There is some sign of tariff pass-through to consumer prices but, at this stage, it is not significant enough to ring alarm bells,” she said.
Who’s Paying for the Tariffs and What’s Next
So far, U.S. consumers have been shielded from most of the direct cost of tariffs. A Goldman Sachs report released Sunday found that through June, Americans had absorbed less than a quarter of the tariff burden, with businesses and foreign exporters covering the majority. However, Goldman expects the consumer share to rise sharply to 67% by October if the new tariffs have effects similar to earlier rounds.
Diane Swonk, chief economist at KPMG US, warned on PBS News Hour that the sheer scale of the tariffs will make them difficult to fully absorb without economic side effects. “The tariffs are so large that they also squeeze profit margins and that means cost-cutting or layoffs,” she said. While layoffs remain low so far, Swonk cautioned that the combination of slower growth and higher prices could create a “stagflationary” environment, where inflation stays stubborn even as economic activity weakens.
As summer turns to fall, the interplay between tariffs, shelter costs, and consumer resilience will be critical in determining whether the Fed proceeds with a rate cut in September and how aggressively it can move in the months ahead without reigniting inflationary pressures.
