Inflation Rises 2.7% Year Over Year Driven by Tariff Increases

The U.S. economy is facing an uncertain future as inflation continues to rise. The Bureau of Labor Statistics reported that the rate of inflation for the 12 months ending in June was 2.7%, which was in line with economists’ expectations. This increase was driven by rises in key categories such as clothing, furniture, and leisure spending, suggesting that tariff-related price increases are beginning to impact the economy.

In June, prices rose 2.7% compared to the previous year, an increase from the May number, which had seen inflation rise 2.4% over the previous 12 months. Core inflation, which excludes food and energy prices, rose 2.9%. This metric is considered a more reliable indicator of price levels because the food and energy categories can be particularly volatile.

Food and energy prices also saw increases in June, with food prices rising 0.3% and energy costs increasing 0.9%. These increases were higher than in May, when food prices rose 0.1% and energy costs had actually fallen 1%.

Despite the acceleration in inflation, the latest report only captures part of the final impact that tariffs might have on the economy. The Federal Reserve has been clear that it feels no urgency to cut interest rates until it can better determine how inflation will play out. The Fed’s prediction is that any tariff-induced spike in inflation would happen around late August or early September.

There is still significant uncertainty about the ultimate impact of tariffs on the economy. The current assumption is that the inflation spike will be temporary, with tariffs leading to a one-time shock that will raise prices before inflation settles back down to a more stable level. However, with no certainty that this will happen, and fearful of loosening interest rates ahead of a possible inflation spike, the Fed prefers to remain cautious.

Tuesday’s report did little to clarify the path forward for the Fed. Its task is further complicated by the White House’s policy changes, which keep shifting the economic landscape the central bank must navigate.

“While any tariff-induced boost to inflation is likely to be short-lived, with higher tariffs being announced it would be wise for the Fed to remain on the sidelines for a few more months at least,” said Seema Shah, chief global strategist at Principal Asset Management.

Tariffs naturally consist of a price increase for any importer, as they must pay a duty on goods entering the U.S. However, questions remain about who will bear the cost of that price increase. Will importers succeed in passing the cost on to foreign suppliers or consumers? The exact rates that will be applied to individual countries and specific categories of goods are not yet clear.

“Part of those tariffs will be absorbed by the importers, by the wholesalers, the transportation companies, advertisers, and retailers, with exact amounts also depending on the elasticities of demand for those products,” wrote Richard de Chazal, U.S. macro analyst.

Many companies front-loaded their inventories earlier this year to avoid tariffs they sensed were coming. Those stockpiles are only now starting to dwindle. Once they’re depleted, companies won’t have a choice but to purchase tariffed goods, inevitably raising their costs.

In Tuesday’s report, price levels for certain consumer essentials rose. Apparel prices were up 0.4% through June after having declined 0.4% the previous month. The household furnishings and operations category, which includes all the goods and services used for maintaining a home, rose 1.0% in June after being up 0.3% in May. Prices for leisure activities also rose in June, with the recreation index increasing 0.4%.

The increase in these categories indicates that import levies are slowly filtering through to core goods prices.