Prices remain stable, yet Trump's tariffs contribute to an increase in certain costs
In the latest Consumer Price Index (CPI) report, consumer prices in the United States rose by 0.2% in July, keeping the annual inflation rate at 2.7%. This increase, however, comes amidst growing concerns over the impact of higher tariffs on various goods categories.
For the second consecutive month, the core goods category, which is under intense scrutiny due to the tariffs, saw a 0.2% rise. This rise was reflected in several sub-categories, such as apparel (up 0.1%) and footwear (up 1.4%). The overall core CPI, which excludes food and energy prices, rose 0.3% from June, marking the fastest increase since January, and bringing the annual rate to 3.1%.
The rise in tariff-exposed goods prices has been particularly noticeable in the apparel and footwear categories. Prices for clothing and textile products have seen large increases, with shoe prices up 39% and apparel prices up 37% in the short run, and these increases have remained elevated by around 17-18% in the long term.
The US labor market appears to be on shakier ground than was thought heading into the Federal Reserve's last rate decision in late-July, with job gains being revised down substantially. This, combined with the rising prices, may lead the Federal Reserve to reconsider its stance on interest rates at its upcoming meeting in September.
The BLS, which provides the critical pricing gauge, has been cutting back on data collection since April, potentially making the monthly data more volatile. This could have implications for the accuracy of the inflation data and the decisions made by policymakers.
The impact of tariffs extends beyond direct consumer goods, affecting upstream industries such as manufacturing, construction, and repair services. For example, construction costs rise due to pricier imported raw materials, potentially slowing projects and increasing housing costs.
The tariffs act as regressive taxes, disproportionately burdening lower-income households. In the short run, lower-income households experience losses over three times greater relative to income compared to top earners (-3.8% vs. -1.1% income impact).
In summary, tariffs in 2025 have caused broad-based price hikes with particularly steep impacts on metals, crops, autos, and clothing, resulting in meaningful cost-of-living increases, especially for lower-income U.S. households. These effects ripple through the economy by raising production costs in key upstream industries as well.
As consumers face more price increases at the grocery store and other places, economists like Gus Faucher, senior vice president and chief economist at PNC Financial Services Group, warn that consumers may start feeling more stretched over the next few months. The next big piece of inflation data is due out Thursday when the BLS releases the Producer Price Index.
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- The escalating tariffs, notably in the apparel and footwear categories, have sparked discussions within the realm of politics, as policymakers contemplate the potential impact on lower-income households.
- The rapid advancements in technology, particularly in data collection methods, are being harnessed to assess the volatility of the current price data, which could significantly influence future policy decisions.
