Home Insights Macro views July CPI report: Tariffs coming in slow but steady
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July CPI report: Tariffs coming in slow but steady

August 12, 2025 | 2 min read
Christian Floro, CFA, CMT
Market Strategist
Magdalena Ocampo
Market Strategist

The July CPI report came in as expected, bringing the annual headline increase to 2.7%, holding steady from last month’s reading. Meanwhile, core inflation—which excludes food and energy—rose to 3.1%, the highest level since February. Signs of the tariff-related impact on prices are beginning to materialize, though they remain relatively modest so far.

Report details

  • Monthly headline inflation rose 0.2% in July, as expected, with the annual rate remaining steady at 2.7%. Core inflation, which strips out food and energy, also came in as expected, increasing 0.3% in July, with the annual rate rising to 3.1% from 2.9% previously. Signs of the tariff-induced boost to consumer prices are still materializing, albeit slowly and more modestly than originally expected. Nevertheless, with the average effective tariff rate expected to increase to around 15% from 2% at the start of the year, the rolling impact of tariffs on prices should be increasingly felt in the months ahead.
  • Food prices were unchanged in July, with prices for food at home falling 0.1% as only two of the six major grocery store food groups increased. Fresh fruits and vegetables, a segment highly exposed to tariff pressures, fell 0.1% from last month, bringing the annual rate to 0.3%. Energy prices decreased by 1.1% in July due to a decline in both gasoline and fuel prices, which have experienced notable volatility this year amid pockets of heightened geopolitical tensions.
  • Core inflation continues to be driven mainly by services prices, which rose 0.4% for the month. While shelter was the most significant contributor to overall inflation again last month, owners’ equivalent rent remained soft, increasing only 0.3%, matching the prior month’s reading. Meanwhile, there were tentative signs of a potential revival in travel demand as airfare prices rebounded 4% following five straight months of decline, while declines in lodging away-from-home prices steadied to 1% from 2.9% previously.
  • Core goods prices rose 0.2% from last month as the effect of tariffs continued to materialize in categories largely sourced abroad. However, its overall impact appears muted, with prices of household furnishings, recreational commodities, and apparel, rising 0.7%, 0.4%, and 0.1%, respectively—a modest downshift from last month’s increase. Deflation in new and used auto prices has also abated as front-loading of activity normalized, with the former unchanged from last month, while the latter rose 0.5%. Overall, a combination of lingering inventory drawdown and firms opting to absorb some price increases to preserve market share likely contributed to the weaker tariff pass-through effect last month, though this is likely to be temporary as consumer prices will probably bear most of the brunt of the tariffs over time.
  • The Fed's preferred supercore inflation measure increased by 0.5%, bringing the annual rate to 3.2% from 3.0% prior. This measure, which excludes shelter from core services and is primarily driven by wage costs, has recently shown signs of picking up, and could potentially be impacted by labor shortages amid heightened immigration enforcement. 

Policy outlook

Although core annual inflation is back to its highest level since February, today’s CPI print is probably not hot enough to derail the Fed from cutting rates in September. The impact of the tariffs on consumer prices is still materializing, but at this stage it is not yet significant enough to ring alarm bells. A combination of inventory run-down together with firms absorbing price increases to protect market share is likely contributing to the weaker pass-through effect.

Yet, the concern for the Fed is that as the factors that have kept consumer prices contained begin to fade, the tariff-induced boost to inflation is likely to grow over the coming months, meaning that inflationary pressures are likely to pick up just as the Fed starts to resume rate cuts. Markets are reacting positively to today’s inflation print, as it implies the Fed can lower rates unheeded next month. Rate cut decisions in October, December and beyond, however, may well be more complicated.

Macro views
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