July CPI Report: Tariffs Continue to Stoke Inflation

Key Takeaways

• Inflation remained elevated in July, thanks in part to President Trump’s new tariffs.
• Increases in shelter costs, airline fares, and healthcare costs also contributed to the overall rise in consumer prices.
• Within a weakening labor market, analysts still expect the Fed to cut interest rates in September.

Consumer prices rose again in July as President Donald Trump’s new import taxes continued to put upward pressure on prices. The month’s Consumer Price Index report “highlighted that the impacts from tariffs are taking effect, and that higher import prices are being passed on to consumers, albeit not at an alarming rate,” says Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth.

Overall, the July CPI report showed that inflation rose at a 2.7% annual rate and 0.2% on a monthly basis. Excluding volatile food and energy prices, the inflation rate rose 3.1% on an annual basis and 0.3% on a monthly basis. The data was roughly in line with economists’ expectations.

Shelter inflation, which rose 0.2% for the month after moderating for the better part of this year, also contributed to the overall increase in consumer prices, as did rising airline fares and healthcare costs.

The Federal Reserve uses a different measure of inflation, the Personal Consumption Expenditures Price Index, as its preferred indicator of price pressures. Preston Caldwell, senior US economist at Morningstar, expects annual PCE inflation to come in at 2.9% in July. That’s well above the Fed’s 2.0% long-term target and higher than its most recent trough of 2.6% in April. Though inflation remains elevated, analysts say a weakening labor market is likely to prompt the Fed to ease policy at its September meeting.

BLS Survey Reductions

Tuesday’s data comes against the backdrop of mounting concerns about the quality of data from the Bureau of Labor Statistics, which is facing staffing shortages and budget cuts.

After the July jobs report came in weaker than expected, Trump called for the firing of the agency’s head without any evidence of wrongdoing in the data. Meanwhile, the BLS says it has suspended data collection in several cities to “align survey workload with research levels.”

Caldwell says the survey cuts are not ideal, but he doesn’t expect the reductions to introduce any bias into upcoming inflation data. He does believe this will make the data marginally more volatile from month to month.

July CPI Report Key Stats

• CPI rose 0.2% for the month after rising 0.3% in June.
• Core CPI also rose 0.3% after rising 0.2% in June.
• CPI increased 2.7% year over year after rising the same amount the prior month.
• Core CPI rose 3.1% from year-ago levels after rising 2.9% in June.

Tariffs Push Goods Prices Higher

So far, the largest impact of tariffs has been seen in rising prices for certain consumer goods. “Core CPI goods increased 0.2% month over month in July, which is above normal,” Caldwell says. That category is typically flat from month to month. Excluding cars, durable goods prices (which include items like furniture and appliances) rose 7.1% over the past three months—the highest rate since 2022—and 0.8% in July, which Caldwell says is “very likely owing to tariffs.”

Car prices have been slower to change “as automakers remain reluctant to hike prices for now, despite bearing substantial tariff costs,” Caldwell says.

September Interest Rate Cut Expected

The Fed has held interest rates at a range of 4.25%-4.50% since last December, citing inflation remaining above its target and a still-solid labor market. Expectations for a September cut jumped dramatically at the beginning of August, when July employment data showed a dramatic decrease in the number of jobs added for that month, as well as substantial downward revisions to previous months’ numbers.

“The weak July employment report and other less-than-stellar economic data make a September rate cut more likely,” says Pappalardo. Bond futures markets have the likelihood of a cut at 94% that month, according to the CME FedWatch Tool.

Caldwell is also expecting a quarter-point cut in September. “The rise in inflation is concerning but still fairly moderate,” he says. “Meanwhile, there’s been a concerning deterioration in data on economic activity and the labor market recently.”

Caldwell also points out that financial markets have expected rate cuts for months. Postponing them further “would constitute an effective tightening of monetary policy at this stage,” he says.