July CPI report: Tariffs coming in slow but steady

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.