U.S. inflation remained stable in July, with rising costs for select imported goods offset by declines in gas and grocery prices, leaving overall prices only modestly higher compared to a year prior.
According to the Labor Department, consumer prices increased by 2.7% in July compared to the same month last year, matching the rate recorded in June and up from a post-pandemic low of 2.3% in April.
When excluding the more volatile food and energy sectors, core prices rose by 3.1%, an increase from the 2.9% seen in June. Both of these inflation rates exceed the Federal Reserve’s target of 2%.
The recent inflation figures indicate that a slowdown in rent increases and declining gas prices are helping to counterbalance some of the effects of President Donald Trump’s extensive tariffs.
Additionally, many companies might still be absorbing the costs associated with these tariffs.
The statistics released on Tuesday likely reflect the impact of the 10% universal tariff imposed by President Trump in April, along with heightened tariffs on countries such as China and Canada.
According to economist Brian Bethune of Boston College, the overall U.S. tariffs have climbed to 10%, the highest levels recorded in decades, and are expected to rise in the coming months as well.
Bethune noted, “Those cost increases will be passed on to the consumer in some way, shape or form.” He further warned about a potential return to ‘shrinkflation,’ where products shrink in size while prices remain the same.
Moreover, companies that are absorbing the costs of tariffs, which could reduce their profit margins, might be less inclined to hire new employees.
The Federal Reserve is now faced with a challenging situation.
Following President Trump’s announcement of tariffs in April, hiring experienced a sharp slowdown in the spring.
The stagnation in job growth has raised financial market expectations for a potential interest rate cut during the central bank’s upcoming meeting in September, especially as some officials have voiced concerns regarding the job market’s health.
Typically, a rate cut by the Fed could lower borrowing costs across various sectors, including mortgages, car loans, and business loans.
Economists are currently divided on how the Federal Reserve officials will interpret the data in the coming months.
Some argue that the deteriorating jobs landscape will outweigh the inflation concerns, prompting the central bank to implement a rate cut at its next meeting in September.
Others maintain that, with core inflation notably exceeding 2% and continuing to rise, the Fed is likely to postpone any decision on rate cuts.
Chair Jerome Powell has cautioned that worsening inflation could keep the Fed inactive, a perspective that has agitated President Trump, who has publicly criticized the Fed’s independence and has called for lower borrowing costs.
On Tuesday, President Trump reiterated his criticisms of Powell, suggesting he would allow a lawsuit against the Fed to move forward due to the rising costs associated with its extensive building renovations.
The specifics of the lawsuit mentioned by President Trump remain unclear.
On a month-to-month basis, consumer prices rose by 0.2% in July, a decrease from the 0.3% increase observed in June, while core prices increased by 0.3%, a slight uptick from the 0.2% reported the previous month.
The government’s report indicated that gas prices experienced a decline of 2.2% from June to July, marking a 9.5% drop compared to the same period last year.
Grocery prices saw a slight decrease of 0.1% last month but are still 2.2% higher than a year ago.
Tariffs have evidently raised the costs of certain imported goods, with shoe prices increasing by 1.4% from June to July, although they are only 0.9% higher than a year ago.
The cost of furniture surged by 0.9% in July, equating to a 3.2% increase year-on-year.
Coffee prices have skyrocketed nearly 15% from the previous year, primarily due to struggling harvests abroad; however, higher tariffs on imports from Brazil may cause these prices to rise even more in the months ahead.
Currently, nearly all coffee consumed in the U.S. is imported.
The data comes at a turbulent time for the Labor Department’s Bureau of Labor Statistics, which is responsible for collecting and releasing inflation figures.
Following the release of the Aug. 1 jobs report, which revealed sharply lower hiring numbers for May and June than had been earlier reported, President Trump dismissed Erika McEntarfer from her role as head of BLS.
On social media, President Trump announced that he has chosen E.J. Antoni, an economist from the conservative Heritage Foundation and a frequent critic of the jobs report, to succeed McEntarfer.
Compounding the challenges at BLS, a government hiring freeze has compelled the agency to scale back its data collection efforts for each inflation report.
UBS economist Alan Detmeister estimates that BLS is currently gathering around 18% fewer price quotes for the inflation report than earlier in the year.
Detmeister believes this will lead to more volatility in the report’s results, though he maintains that the data will still be reliable when averaged out over time.
Smaller companies are exploring ways to avoid raising prices while seeking alternative funding sources.
For instance, clothing maker Princess Awesome, which specializes in coordinating outfits for children and adults, has seen costs increase by 15% to 20% due to tariffs.
The company has filed a lawsuit aiming to challenge the duties.
Rebecca Melsky, co-founder and chief executive of the company, noted that manufacturing the cotton-blend fabrics used is prohibitively expensive in the U.S.
Presently, the company has introduced a “tip jar” on its website, asking customers for contributions to help mitigate the costs of goods.
Melsky stated, “We have not across the board raised prices because of the tariffs — yet.”
President Trump has maintained that international manufacturers will absorb the tariffs by lowering their prices to counterbalance the duties.
However, pre-tariff prices of imports have not shown significant declines since the tariffs were implemented.
Goldman Sachs economists estimate that foreign manufacturers absorbed only 14% of the duties by June, while consumers bore 22% of the burden and U.S. companies absorbed 64%.
Nevertheless, they expect that by autumn, the consumer burden will increase to two-thirds, with foreign exporters covering a quarter and U.S. companies handling less than one-tenth.
Several large corporations have begun increasing their prices, including apparel brands Ralph Lauren and Under Armour, along with eyewear company Warby Parker.
Most of these price hikes were not yet implemented at the time of the Tuesday inflation report.
Procter & Gamble, the consumer products giant behind brands like Crest, Tide, and Charmin, announced last month that they would be raising prices on approximately a quarter of their product lineup by mid-single-digit percentages starting in August.
Walmart has also raised its prices.
Cosmetics manufacturer e.l.f. Beauty, which produces a majority of its items in China, revealed on Wednesday that it raised prices by a dollar across its entire product range as of Aug. 1 due to tariff costs, marking the third price increase in its 21-year history.
The current economic climate reveals the intricate interplay between tariffs, inflation, and the overall health of the job market as U.S. businesses navigate these challenges.
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