U.S. core inflation increased at a 2.9-per-cent annual rate last month, slightly below the 3-per-cent consensus forecast.Spencer Platt/Getty Images
Rising prices across an array of goods from coffee to audio equipment to home furnishings pulled U.S. inflation higher in June in what economists see as evidence of the Trump administration’s increasing import taxes passing through to consumers.
Overall consumer prices rose 0.3 per cent in June, a roughly 3.5-per-cent annual rate, after a 0.1-per-cent increase in May.
Economists – and Fed officials – say they were expecting inflation to gather pace this summer as the lagged impact of tariffs gets passed along by businesses, and the June data suggest central bank policy makers in particular may remain reluctant to cut interest rates until more information is at hand. The tariff price shock could ultimately prove a temporary, one-time adjustment. But with the final tariff levels still being considered by President Donald Trump, and steeper levies threatened as of Aug. 1, the inflation outlook remains unsettled.
“Today’s report showed that tariffs are beginning to bite,” said Omair Sharif, head of Inflation Insights, “apparel prices rose, household furnishing prices jumped ... and recreation commodities increased.”
U.S. consumer prices increased by the most in five months in June amid higher costs for some goods, suggesting tariffs were starting to have an impact on inflation and potentially keeping the Federal Reserve on the sidelines until September.
Reuters
Those are heavily imported items and the increases were substantial. Prices for audio-video equipment rose 1.1 per cent over the month and have risen 11.1 per cent on a year over year basis, the largest jump ever in a category where globalization had generally meant steady or falling prices. It will likely strike a note of caution for the Fed, which has been facing almost daily criticism from Trump for not cutting interest rates, a step central bankers have been reluctant to take until it is clear where the tariffs will leave the U.S. economy.
Fed officials see the most likely immediate outcomes as higher inflation, slower growth, or a combination of both. The Trump administration argues that over time its tariff proposals will boost economic growth and keep inflation moderate, and that rates should be lowered in the meantime. Trump on social media said that consumer prices were “LOW” and repeated his call for the Fed to cut rates. The consumer price level was about 1.2 per cent higher in June compared with December, the last full month before Trump started his second term.
White House Press Secretary Karoline Leavitt said the fact that core inflation, which excludes food and energy prices, increased less than expected, “proves that President Trump is stabilizing inflation.”
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Core inflation increased at a 2.9-per-cent annual rate in June, slightly below the 3-per-cent consensus forecast, but slightly faster than in May. Food and energy costs both increased, pushing headline inflation up to 2.7 per cent from 2.4 per cent the month before.
“With increases in categories like household furnishings, recreation, and apparel, import levies are slowly filtering through,” wrote Seema Shah, Chief Global Strategist at Principal Asset Management. “It would be wise for the Fed to remain on the sidelines for a few more months at least.”
Investors still expect the Fed in September to cut a quarter of a percentage point from the current 4.25 per cent to 4.5 per cent benchmark interest rate maintained since December, but odds of a cut at the upcoming July 29-30 meeting are now below 5 per cent.
Powell had earlier pinpointed this summer as the time when the U.S. central bank will learn if inflation is responding to the tariffs applied on trading partners and various industrial sectors.
So far the levies were having only a limited impact on inflation, but economists broadly have expected to see them eventually filter into retail prices.
“We know there is a lag between implementation and the inflationary effect,” said Gregory Daco, chief economist at EY-Parthenon. “Businesses manage imports using different processes ... We have not seen the full-blown effects of tariffs on CPI data ... I would expect to start to see more.”
The June CPI data will likely leave the Personal Consumption Expenditures Price Index the Fed uses for its 2-per-cent inflation target well above that goal, with increased uncertainty now that Trump has threatened tariff levels of 30 per cent or more on Mexico, Canada and the European Union, and more actions always possible.
The PCE index outside food and energy rose at a 2.7-per-cent annual rate in May; recent Fed policy maker projections see it hitting 3.1 per cent by the end of 2025; and the most recent round of tariffs threatened by Trump for Aug. 1 could push it even higher.
The new tariff rates “if fully passed through, would add about 0.4 percentage points to the PCE price level,” Michael Feroli, chief U.S. economist at JP Morgan, estimated. “Given imperfect pass-through, margin compression, a more likely estimate is 0.2-0.3 points. We think this bolsters the case for the Fed to take a very cautious approach to rate cuts.”
Daco said there was already “divergence” beginning across a wide swath of goods where prices are rising faster than they did before Trump’s initial rounds of tariffs.
The price of household furnishings, for example, jumped a full percentage point in June. Prices of those products had been dropping, but reversed course in the spring.
Other economists have pinpointed different items that could show where the new import taxes are starting to hit consumer prices.
Sharif, the head of Inflation Insights, said the broad category referred to as “recreational commodities,” which includes things like toys and audio and visual equipment that are often imported from China, bears watching – and rose 0.8% in June, twice as fast as in the preceding two months.
Outdoor equipment and tools are also items that are heavily imported, and while the pace of price increases had picked up in the spring it fell back in June to 0.2 per cent versus 0.6 per cent in May.
Still, “tariff costs are strikingly visible in June’s CPI data,” wrote Samuel Tombs, chief U.S. economist for Pantheon Macroeconomics. Excluding autos, prices for other non-food or energy goods rose at the fastest pace since June, 2022, when the Fed was still in a battle to lower pandemic-era inflation.
“Prices rose especially sharply for goods which are primarily imported,” with prices for appliances, sports equipment and toys all rising nearly 2 per cent on the month, he said.