A widely followed measure of inflation accelerated slightly less than expected in July on an annual basis as President Donald Trump’s tariffs showed mostly modest impacts.
The consumer price index increased a seasonally adjusted 0.2% for the month and 2.7% on a 12-month basis, the Bureau of Labor Statistics reported Tuesday. That compared to the respective Dow Jones estimates for 0.2% and 2.8%.
Excluding food and energy, core CPI increased 0.3% for the month and 3.1% from a year ago, compared to the forecasts for 0.3% and 3%. Federal Reserve officials generally consider core inflation to be a better reading for longer-term trends.
The Bureau of Labor Statistics said a 0.2% increase in housing costs was the primary driver of the index's rise, while food prices were flat and energy prices fell 1.1%. Prices of new vehicles, which are subject to tariffs, also remained unchanged, but prices of used cars and trucks rose 0.5%. Prices of transportation and healthcare services both rose 0.8%.
Stock futures rose after the report, while Treasury yields mostly fell.
Tariffs did appear to be showing up in several categories.
For example, home furniture and furnishings rose 0.7% after a 1% increase in June. However, apparel prices rose only 0.1%, and core commodity prices rose just 0.2%. Prices of canned fruits and vegetables, which are typically imported and tariff-sensitive, were flat.
"Tariffs are a number issue, but they're certainly not going to explode right now," said Jared Bernstein, a former White House economist who served under former President Joe Biden.
The report comes at a critical juncture for both the economy and the Bureau of Labor Statistics (BLS). Trump has drawn criticism for his criticism of the Bureau of Labor Statistics (BLS) for alleged political bias. Earlier this month, he fired the former BLS director following the unexpectedly weak July nonfarm payroll report. On Monday, he announced he would nominate E.J. Antoni, a BLS critic, as the new director.
Despite the ongoing political wrangling, Federal Reserve officials are closely monitoring inflation indicators as they weigh their September interest rate decision.
The question is whether the tariffs will lead to a one-time price increase or a sustained resurgence of inflation. Economists generally agree that the tariffs will have the former impact, but the broad scope of goods covered by Trump's order raises concerns that the effects could be more prolonged.
Futures market pricing is pointing strongly to a Fed rate cut in September. However, a raft of data between now and then could influence both the decision for that meeting and the central bank’s future course. Fed officials of late have been expressing increasing levels of concern about the labor market, which would bode for rate reductions.
Traders increased the implied odds for a September move following the release, and also put the chances of another reduction in October at about 67%, up from 55% the day before, according to the CME Group’s FedWatch.
The CPI is not the Fed’s primary inflation forecast tool. The central bank uses the Commerce Department’s personal consumption expenditures price index, but the CPI, as well as the producer price index that will be released Thursday, feeds into that calculation.