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Tariffs

US Inflation Figures Suggest Tariffs Not Causing Widespread Price Increases

Strategic Insights

— 1 min read

US consumer price inflation data released on Tuesday showed annual inflation remaining at 2.7% in July, while core CPI increased to 3.1% from 2.9% in June. Contrary to expectations, the tariffs implemented in July did not result in significant price increases, with businesses absorbing most of the costs. This has led to increased expectations for a rate cut by the Federal Reserve in September, with the chance of a rate cut rising to 96% according to the Fed Fund Futures market.

Key Takeaways:

  • The July report showed annual US consumer price index inflation was a notch lower than expected at 2.7%, while core CPI was higher than anticipated at 3.1%.
  • The tariffs implemented in July did not result in significant price increases, with businesses absorbing most of the costs.
  • Core goods ex-autos rose 0.2% month-on-month, suggesting that corporates are absorbing most of the tariff costs.
  • The report boosted expectations for Fed rate cuts, with the chance of a rate cut in September now at 96% according to the Fed Fund Futures market.
  • A September rate cut looks likely, with James Knightley at ING noting that inflation was broadly in line with expectations and tariffs continue to be largely absorbed within US corporate profit margins.
  • Core goods inflation showed mixed signs of tariff pass-through, with Veronica Clark at Citi noting that while there have been some modest signs of tariff pass-through in goods such as home furnishings and recreation goods, "upside is clearly less than expected" a few months ago.
  • Pooja Sriram at Barclays estimates July core PCE inflation could increase 0.24% month-on-month after incorporating the CPI data.
  • The tariffs in place sum to a 14% to 17% trade-weighted tariff rate, substantially higher than the 2.5% in place going into this year, and undoubtedly inflationary for goods prices, according to Sriram.

Statistics:

  • Annual US consumer price index inflation: 2.7%
  • Core CPI: 3.1%
  • Monthly inflation rate: 0.2%
  • July core annual CPI inflation: 3.1%
  • July monthly core inflation: 0.3%
  • Chance of a rate cut in September: 96% according to the Fed Fund Futures market
  • Trade-weighted tariff rate: 14% to 17%

Sources:

  • XTB's Kathleen Brooks
  • ING's James Knightley
  • Citi's Veronica Clark
  • Barclays' Pooja Sriram
  • Bank of America
  • TD Economics
  • Federal Reserve
  • Fed Fund Futures market
  • Bureau of Labor Statistics
  • FXStreet

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