Never Fully Beaten, Inflation Is Coming Back to Life Just in time for a rates showdown between Trump and the Federal Reserve. (John Authers)
(…) Much remains unclear, and there is plenty to argue about, but the data taken in the large make it impossible for the Federal Reserve to cut rates without a clear improvement. (…)
Tariffs would raise their ugly head most obviously in core goods, excluding food and energy. Reviewing how much this sector contributed to overall inflation, we can say that the problem is still nothing serious, but also that the trend is plainly going in the wrong direction. Core goods inflation had been negative for many years before the post-pandemic spike. Its current rate is the highest in more than a decade, outside of that spike:
Exclude cars, and Omair Sharif of Inflation Insights LLC says core goods prices rose 0.55% in June, the most since November 2021. Tariffs aren’t hurting terribly and the effect may prove transitory, but they are starting to bite. (…)
But a range of measures of underlying inflation watched by the Fed all showed price rises increasing again. This was true of the median and the trimmed mean (excluding outliers and averaging the rest); sticky prices, which are difficult to reduce; and the “supercore” measure of services excluding housing. All are back above the 3% upper bound of the Fed’s target, and all are higher than they had been for decades before the spike (with the exception of the trimmed mean, which was briefly higher when oil prices were at an all-time high in 2008).
The direction of travel matters, and it’s going the wrong way:
None of this proves that tariffs are going to create another price spike. It does, however, suggest that progress on inflation has ended, without ever getting back to theFed’s target. And when it comes to the cost of living for the working class, the issue that dominated last year’s presidential election, the trend is again moving in the wrong direction. (…)
More signs of tariffs percolating into consumer prices were evident in June. Core goods prices rose 0.20% compared to an average monthly increase of 0.07% the prior six months. The pickup came despite further declines in both new and used vehicle prices as auto sales have struggled in the wake of a pre-tariff rush of purchases.
Excluding vehicles, core goods prices rose 0.54%—the strongest monthly increase since early 2022. Price gains were widespread, with household furnishings (+1.0%), apparel (+0.4%), motor vehicle parts (+0.6%), recreational items (+0.8%) and other goods (+0.3%) standing out.
Core services rose 0.25% in June, a touch softer than its trend over the past six months (+0.27%). Prices for travel services fell for the fifth consecutive month, as hotel prices plummeted 2.9% and airline fares slipped 0.1%. The continued slide in these components is illustrative of a pullback in discretionary spending and points to weakening pricing power among service providers.
On the other hand, non-discretionary services inflation strengthened, including a 0.5% increase in medical services prices. Primary shelter inflation modestly firmed, rising 0.3% and leaving the year-over-year rate unchanged at 4.1%.
- Core services without housing jumped by 0.38% in June from May (+4.6% annualized), the worst increase since January. None of these services are tariffed. The six-month average accelerated to 4.2% (red in the chart). So that’s a worrisome development. (Wolf Richter)
Ed Yardeni:
Today’s CPI report for June suggests that consumer price inflation is no longer declining toward the Fed’s 2.0% target. Instead, it might continue to hover around 3.0% for a while as it has recently (chart). Trump’s tariffs may be a contributing factor, though their impact remains debated. The core CPI inflation rate upticked to 2.9% last month, hinting that the core PCED inflation rate (at 2.7% in May) might have followed a similar trend.
The June CPI report reinforces the FOMC’s cautious stance. Although Trump’s tariffs may not yet be significantly driving inflation, they appear to be contributing to inflation stalling at around 3.0%, supporting the FOMC’s hesitation to lower the FFR.
Goldman Sachs:
Based on the details in the CPI report, we estimate that the core PCE price index rose 0.29% in June (vs. our expectation of 0.25% prior to today’s CPI report), corresponding to a year-over-year rate of +2.75%. Additionally, we expect that the headline PCE price index increased 0.32% in June, or increased 2.55% from a year earlier.
In another analysis, Wells Fargo economists support my own:
(…) The downward revisions were not exactly shocking to anyone struggling to reconcile strong spending against the sharp deterioration in various measures of consumer confidence. The lackluster spending has not been limited to just the first quarter. With two months of data now on hand for the second quarter, there is a clear warning sign for consumer spending that has gone largely overlooked: households are reducing their discretionary spending.
Earlier in this cycle, we noted that in more than 60 years, there has never been a recession without real discretionary spending falling on a year-over-year basis. Until recently, the worst that can be said of discretionary spending is that it is growing at a slower pace.
Discretionary purchases slipped in the first quarter, and while we estimate discretionary spending is still up close to 1.5% over the past year through May, that is a full percent lower than its average run-rate last year. A word of caution: some of what looks like “strength” here could simply be a function of pulled-forward demand that lifted spending on some key goods categories late last year before higher tariffs potentially made them more expensive. In short, discretionary goods spending has held up.
Discretionary services spending has not. On a year-over-year basis, discretionary services spending is down 0.3% through May. That is admittedly a modest decline, but what makes it scary is that in 60+ years, this measure has only declined either during or immediately after recessions. (…)
Of the eight major spending categories, just three of them account for 63 cents of every dollar spent on discretionary services: food services (the largest, with a 28.1% share), recreational services (19.3%) and transportation (15.7%).
After accounting for inflation, households are spending just 0.9% more when they go out to eat compared to a year ago. This largest category of discretionary services spending is increasing, but only incrementally.
Recreational services, which includes money spent on things such as clubs, gym memberships and online streaming services, is holding on by a thread, up just 0.2% year-over-year.
Transportation spending is falling, down 1.1% over the past year. Within transportation, the places where households are cutting back most include auto maintenance, taxi & ride-sharing, and the biggest decline of all: air travel, down 4.7% over the past year.
The fact that households are putting off auto repair, not taking an Uber and cutting back or eliminating air travel points to stretched household budgets. The largest pullback in discretionary services is stemming from relatively small components: professional services (down 3.1% over the past year) and accommodations (down 1.9%)—but almost all components have slowed on trend, highlighting the broad weakness in services demand today. (…)
Part of reason we have not yet seen price pass-through is because of inventories.
Many businesses and retailers pulled forward demand for product ahead of tariffs. U.S. goods imports jumped over $50 billion adjusted for inflation in December through March as businesses rushed to get goods ashore. This intended stockpiling led inventories to expand $160 billion in the first quarter, and more inventory on hand means firms can mitigate the initial pass through of higher prices stemming from tariffs, particularly if sales slow.
Most estimates suggest it takes about two-to-three months for tariffs to be passed through to consumer prices. Inventories may lengthen that timeline, but they won’t completely offset it. The on-again, off-again approach to tariff policy could also be a mitigating inflation factor in that postponing tariffs can delay the necessary pass-through and even encourage some price absorption by businesses to the extent they view tariffs as a temporary negotiation tactic rather than persistent policy. (…)
Consumer spending is simply not as sturdy as we previously thought it was or even as it was first reported to be. We’ve long held the view that a stable labor market can offset tariff-induced inflation, and that may still be true and would prevent more of a recessionary impulse from ensuing. But consumers have shifted their behavior in the wake of tariffs.
Consumers are undeniably cutting back on discretionary service outlays. On the goods side, spending on key tariff-linked items show a measurable pull-forward followed by an air pocket. Finally, the lack of widespread price impacts has been kept in check by retailers who salted away inventories for just this sort of moment. When pre-tariff inventories have been drawn down, the cost pass-through will be stark.
Tariffs and tight budgets reshape back-to-school shopping
Back-to-school is the second-biggest retail event of the year, after the holidays. This season is a stress test for family budgets and a strategy test for retailers trying to hold onto value-conscious shoppers.
New U.S. tariffs on Chinese imports — including backpacks, pens, binders and shoes — kicked in earlier this year, rose sharply, then came back down to levels still historically high.
- Some retailers stocked up early and “purchased a lot in advance, and some didn’t purchase as much because of the uncertainty,” Deborah Weinswig, CEO of Coresight Research, told Axios.
- “Clients of ours who are in denim or basics brought everything in early. They’ve been warehousing it,” Weinswig said.
67% of back-to-school shoppers had already started buying for the coming school year as of early June, according to the National Retail Federation’s annual survey of nearly 7,600 consumers, released Tuesday.
- This is up from 55% last year and the highest since NRF started tracking early shopping in 2018, the group said.
- 51% of families said they are shopping earlier this year compared with last year “out of concern that prices will rise due to tariffs,” NRF said.
- School supply purchases were up 175% during last week’s Prime Day, Adam Davis, managing director at Wells Fargo Retail Finance, tells Axios, citing Adobe Analytics data.
- Davis says this shows “price-weary consumers were looking to make the most of retail sales.”
NRF said Tuesday that families with students in elementary through high school plan to spend an average of $858.07 on clothing, shoes, school supplies and electronics, down from $874.68 in 2024. Total spending is estimated at $39.4 billion, up from $38.8 billion last year.
The full impact of tariffs hasn’t hit store shelves yet — and back-to-school season may be the first test of how much price pressure shoppers will tolerate, according to a Wells Fargo Investment Institute report released Monday.
- The June Consumer Price Index shows a 3.4% increase in stationary, stationery supplies and gift wrap and a 10.2% price index in college textbooks.
“Retailers have done a solid job front-loading inventory to delay price spikes — so for now, many shelves still reflect pre-tariff costs,” David Warrick, EVP at supply chain risk firm Overhaul, told Axios. “But that buffer may run out by late summer or early fall.”
- “We’re starting to see price creep on everyday items — including school supplies — but the full impact of tariffs will likely cascade in phases,” Warrick said.
- “Many of these categories are caught in the crossfire of the latest tariff expansions, and we’re expecting an average price increase of 12 to 15% across back-to-school essentials,” Warrick added.
Canada: Inflation pressures remain too high in June despite a weakened economy
The latest inflation data aligns broadly with expectations, showing an annual inflation rate of 1.9%. At first glance, this figure is not alarming as it is close to the Bank of Canada’s target of 2.0%. However, when the impact of indirect taxes is removed, which decreased with the abolition of the carbon tax, the consumption basket rose by 2.5%.
This rate is comfortably within the higher band of the Bank of Canada’s target range. The central bank’s preferred core inflation measures, which exclude the most volatile components each month, are increasing at an even faster pace, averaging 3.0%.
Recent momentum shows no signs of slowing, with the three-month annualized change at 3.4% and the monthly change in June at 3.1% (annualized).
Given this morning’s data, it is even more likely that the Bank of Canada will remain on the sidelines in July, especially since private employment is showing signs of recovery, according to the LFS survey in June. (…)
We continue to believe that monetary accommodation will be necessary by the end of the year. Firstly, we remain skeptical about the improvement in the labor market reported by the notoriously volatile LFS survey, despite ongoing tariff uncertainty and other economic indicators suggesting the economy is still in contraction going into Q3.
Furthermore, various measures of wages suggest that current inflationary pressures could ease in the coming months. Finally, rents, which were still rising sharply in June, are also expected to moderate over the next 12 months, as evidenced by the decline in asking prices. Overall, it can take time for economic weaknesses to be reflected in inflation, and this is likely the case at the moment.
New York Factory Activity Expands for First Time in Five Months
The Federal Reserve Bank of New York’s general business conditions index increased 21.5 points to 5.5, data showed Tuesday. Readings above zero indicate expansion. None of the economists in a Bloomberg survey projected growth.
Meanwhile, an index of current prices paid for materials increased more than 9 points to 56. A gauge of prices received retreated nearly a point.
Trump Says Drug Tariffs Probable by Aug. 1, Downplays More Deals
President Donald Trump said he was likely to impose tariffs on pharmaceuticals as soon as the end of the month and that levies on semiconductors could come soon as well, suggesting that those import taxes could hit alongside broad “reciprocal” rates set for implementation on Aug. 1.
“Probably at the end of the month, and we’re going to start off with a low tariff and give the pharmaceutical companies a year or so to build, and then we’re going to make it a very high tariff,” Trump told reporters Tuesday as he returned to Washington after attending an artificial intelligence summit in Pittsburgh.
Trump also said his timeline for implementing tariffs on semiconductors was “similar” and that it was “less complicated” to impose levies on chips, without providing additional detail. (…)
Trump on Tuesday predicted that he could strike “two or three” trade deals with countries before implementing his so-called reciprocal tariffs before they are implemented on Aug. 1, saying that an agreement with India was among the most likely.
Trump told reporters the US was engaged in substantive discussions with between five and six countries, but that he wasn’t necessarily inclined to finalize agreements over simply dictating a tariff rate.
“I would say India, and we have a couple of others, but I have to tell you, for the most part, I’m very happy with the letters,” Trump said.
The president also said that he was likely to impose a standard tariff of “probably a little over 10%” on smaller countries that did not receive tailored rates.
Earlier Tuesday, Trump said representatives from the European Union — which faces a 30% tariff — would be meeting with US negotiators this week. After returning from Pittsburgh, Trump said that while some countries had indicated a willingness to “open” trade after his threats — including South Korea — others, like Japan, had not. (…)
(…) While countries such as India and Vietnam have attempted to negotiate US tariffs of well below 20%, Trump has said he’s eyeing blanket tariffs of 15% to 20% on most trading partners. This suggests the 20% level is no longer perceived as a penalty but rather as a standard in the negotiations. (…)
“So far, equity markets have reacted calmly as the reduction of uncertainty has been viewed positively,” said Rajeev De Mello, a portfolio manager at Gama Asset Management SA. Still, “20% US tariff levels are a worrying evolution, which would lead to a higher effective US tariff than what was expected a few weeks ago,” he said. (…)
Others point to the market’s waning sensitivity to tariff news in general.
“Investor concern over President Trump’s trade war posturing is fading fast, even as he broadens the conflict,” Bank of America strategists including Ritesh Samadhiya in Hong Kong, wrote in a note published Tuesday.
The bank’s latest fund manager survey “captures this growing optimism — a striking 70% of the participants view the potential hit to Asian economies/markets as only slightly negative — marking the most optimistic reading since December,” they wrote.
Mining giant Rio Tinto Group said US tariffs on its Canada-made aluminum generated gross costs of more than $300 million in the first half, in another sign of how President Donald Trump’s trade agenda is shaking up metals supply chains.
The world’s second-biggest miner is also Canada’s largest aluminum producer, and sells the vast bulk of the metal in the US. Rio said Wednesday it incurred gross costs of $321 million associated with US tariffs on aluminum, but added that a “substantial part” has been clawed back from higher premiums on US sales. (…)
Rio said premiums in the US market — paid on top of exchange prices — rapidly adapted to the initial 25% tariff, but were not fully compensating for the 50% level by the end of the second quarter. (…)
Futures tracking aluminum prices in the US have pointed to higher costs for American buyers, and industry executives have warned the tariffs risk crushing American demand. Earlier this month, beverage maker Constellation Brands Inc. said it expects aluminum tariffs to cost the company about $20 million over the remainder of its fiscal year.
Contracts linked to the premium on the metal delivered to the Midwest have almost tripled this year to reach a record near 66 cents a pound.
“The impact of tariffs is still feeding through to inflation and sentiment,” Rio said in an overview of the US economy in its first-half production report.
The FT:
The cost of Trump’s tariffs are also not falling solely on American consumers, supply chain experts say, as international brands look to spread the impact of cost increases around the globe to minimise the impact on the US market. Simon Geale, executive vice-president at Proxima, a supply chain consultancy owned by Bain & Company, said major brands such as Apple, Adidas and Mercedes would look to mitigate the impact of price increases.
“Global brands can try and swallow some of the tariff cost through smart sourcing and cost savings but the majority will have to be distributed across other markets, because US consumers might swallow a 5 per cent increase, but not 20 or even 40,” Geale said.
State of U.S. Tariffs: July 14, 2025
From the Yale Budget Lab:
- Consumers face an overall average effective tariff rate of 20.6%, the highest since 1910. After consumption shifts, the average tariff rate will be 19.7%, the highest since 1933.
- The price level from all 2025 tariffs rises by 2.1% in the short-run, the equivalent of an average per household income loss of $2,800 in 2025$. Annual pre-substitution losses for households at the bottom of the income distribution are $1,500. The post-substitution price increase settles at 1.8%, a $2,300 loss per household.
- The 2025 tariffs disproportionately affect clothing and textiles, with consumers facing 44% higher shoe prices and 40% higher apparel prices in the short-run. Shoes and apparel prices stay 20% and 18% higher in the long-run respectively.
- US real GDP growth over 2025 is -0.9pp lower from all 2025 tariffs. In the long-run, the US economy is persistently -0.5% smaller, the equivalent of $135 billion annually in 2024$.
- The unemployment rate rises 0.5 percentage point by the end of 2025, and payroll employment is 641,000 lower.
A return to tariffs, Taco or not Trump’s focus on the goods of the past is ridiculous. What matters is competitiveness in the future (Martin Wolf)
(…) It is, not least, crazy to believe the US can run a huge fiscal deficit without also running large trade and current account deficits, at least as long as the rest of the world is prepared to finance them. What happens if or when the world stops? A financial mess. (…)
In the meantime, the irrational patchwork of tariffs now being proposed would cause large misallocations of resources. One of the points the Trump regime is unable to understand is that tariffs on some goods are a tax on production of others. High tariffs on inputs, such as steel or aluminium, are a tax on producers of the goods that use them.
If the latter produce import substitutes, tariffs could at least partially offset such costs. But if they produce exportables, they could not.
So, Trump’s tariffs would benefit the least internationally competitive parts of the economy at the expense of the most competitive. Does that make sense? Obviously not.
Worse, the entire focus on the goods of the past is ridiculous. What matters is competitiveness in the future. This then is the economic equivalent of attempts to recreate dinosaurs. As MIT’s David Autor and Harvard’s Gordon Hanson note, the challenge for the US today is China’s rise as a technological and scientific superpower. If it is to respond, the US must co-operate with its allies, devote far greater resources to scientific research and welcome talented immigrants — the exact opposite of what Trump is doing.
“Make American Great Again”? Hardly. Markets are ignoring these longer-run perils for the US. They might be right. But then they might not. (…)
So, what is to be done about this madness? First, we should hope that Trump does indeed chicken out again and again and again, though the uncertainty created would still be costly. Second, there must be retaliation — ideally co-ordinated retaliation — against the US. Third, all members of the World Trade Organization should declare that any trade concessions made to the US will be extended to other members, in accordance with the “most favoured nation” principle. Finally, the other members should also abide by their agreements with one another.
The US has gone rogue. The rest of the world need not follow.
Bessent Suggests Powell Should Leave Fed Board in May
US Treasury Secretary Scott Bessent suggested that Federal Reserve Chair Jerome Powell should step down from the central bank’s board when his term as chair is up in May 2026.
“Traditionally, the Fed chair also steps down as a governor,” Bessent said in an interview with Bloomberg Television Tuesday. “There’s been a lot of talk of a shadow Fed chair causing confusion in advance of his or her nomination. And I can tell you, I think it’d be very confusing for the market for a former Fed chair to stay on also.”
Powell’s term as a Fed governor doesn’t end until January 2028, leaving it possible for him to remain at the central bank — and to participate in monetary policymaking — even after his tenure as the chair comes up next May. (…)
BTW:
Breadth has been visibly lacking, as Bloomberg News has reported. The Magnificent Seven index of megacap stocks has surged about 36% from its April lows, compared to 25% for the S&P. Bloomberg Intelligence strategists Gina Martin Adams and Gillian Wolff say the rally is powered by 10% of stocks, down from a 22% average between 2010 and 2024. That’s not a good sign. (…)
Overall, the S&P 500 is up 6.16% for the year, but 219 member stocks are down. Vincent Deluard of StoneX Financial says the rally is “carried by the Magnificent Seven, which foreign investors have not sold because these companies have no equivalent outside of the US.” Describing the country as “an emerging market with magnificent monopolies,” he suggests it’s vulnerable to an EM-like selloff once liquidity tightens. It certainly looks unhealthily narrow. (John Authers)