Powell's Prudent Approach: Waiting for More Data on Tariff Impact

The latest inflation data show that Federal Reserve Chair Jerome Powell's wait-and-see approach is the exact right tack for today's economic outlook. Despite President Trump's demand for three percentage points of rate cuts, the inflation data suggest that Powell's decision to hold interest rates steady at 4.25 percent-4.5 percent since he took office is justified. The core consumer price index rose 0.2 percent in June from a month earlier, a slightly encouraging surprise that leaves the year-over-year rate at 2.9 percent.

The data also show that tariffs are starting to fan higher prices, with core goods rising 0.2 percent in June from a month earlier, the most brisk pace since February. Specifically, household furnishings and supplies, a telltale sign of tariff passthrough, jumped by 1% from the prior month, the biggest such increase since January 2022. Recreation commodities also notched the biggest month-on-month jump since 2022.

Key Takeaways:

• The inflation data suggest that Powell's wait-and-see approach is the right tack for today's economic outlook.
• Tariffs are starting to fan higher prices, with core goods rising 0.2 percent in June from a month earlier.
• Household furnishings and supplies jumped by 1% from the prior month, the biggest such increase since January 2022.
• Recreation commodities also notched the biggest month-on-month jump since 2022.
• The Fed's median policymaker would deem the current interest rates restrictive.
• Tariffs are generally seen as a one-off increase in prices, but their impact can spread further.
• The ultimate question is whether tariffs will shock expectations to such an extent that inflation gets back into the bones of the economy.
• Other key categories in the inflation basket, such as the auto sector, are also affected by tariff uncertainty.
• Core services, which constitute about three quarters of core CPI and about two thirds of inflation overall, may mitigate the jumps in certain core goods prices.

Statistics:

• The core consumer price index rose 0.2 percent in June from a month earlier.
• The year-over-year rate of inflation stands at 2.9 percent.
• Core goods rose 0.2 percent in June from a month earlier, the most brisk pace since February.
• Household furnishings and supplies jumped by 1% from the prior month, the biggest such increase since January 2022.
• Recreation commodities notched the biggest month-on-month jump since 2022.
• The auto sector is a big question mark due to tariff uncertainty, with prices of new and used vehicles falling in June from May.

Sources:

• Bureau of Labor Statistics
• Goldman Sachs Group Inc.
• Federal Reserve
• Council of Economic Advisers
• President Donald Trump's social media posts
• Inflation Insights by President Omair Sharif