By Andrew Moran
The closely watched Consumer Price Index rose less than expected in July, and President Donald Trump’s tariffs had little impact on the overall data, says a top U.S. economist.
According to the Bureau of Labor Statistics, the headline annual inflation rate held steady at 2.7 percent and rose at a seasonally adjusted pace of 0.2 percent for the month.
Economists penciled in readings of 2.8 percent and 0.2 percent, respectively.
Core inflation, however, accelerated to a slightly higher-than-expected 3.1 percent on a 12-month basis, the highest since February. The monthly core rate increased by 0.3 percent, the most significant jump since the start of the year.
The Federal Reserve and economic observers place more weight on the core side of inflation readings, as it excludes noise from higher energy and food prices, and can help determine long-term trajectories.
All the focus was on whether the president’s higher tariffs were showing up in the inflation data.
“Tariffs have had limited effects on inflation so far,” Bill Adams, chief economist for Comerica Bank, said in a note emailed to The Epoch Times.
“But since tariff rates are up one day, down the next, then up even more the day after, it is too early to say how large their effect on prices will ultimately be.”
A closer examination of the July report suggests that prices for tariff-sensitive items are not surging.
The index for apparel ticked up 0.1 percent and is down 0.2 percent on a 12-month basis.
Appliances fell 0.9 percent from June to July and have tumbled 0.3 percent year over year.
New cars and trucks were flat after the 0.3 percent drop in June. Used cars and trucks rose 0.5 percent, snapping a four-month streak of falling prices.
Prices for canned fruits and vegetables—these are mostly imported from China, South Korea, and Vietnam—remained flat overall last month. However, a closer look reveals a 0.6 percent increase in canned fruit prices, offset by a 0.3 percent decline in canned vegetables.
The toys index edged up 0.2 percent. Smartphones remained largely unchanged, while televisions increased by 0.5 percent.
Some goods did register accelerated price growth, such as household furnishings (0.7 percent) and motor vehicle parts and equipment (0.9 percent).
Coffee, which is sensitive to levies amid a 50 percent tariff rate on Brazilian imports, surged 2.3 percent in July. Pet food and pet supplies and accessories rose 0.5 percent.
Some companies might be delaying price increases, Adams notes.
“Some businesses are probably holding off on price increases while they wait to see where tariff rates settle out,” he said.
According to the Federal Reserve’s Beige Book—a periodical report summarizing economic conditions across the central bank’s 12 districts—many businesses have “passed on at least a portion of cost increases to consumers through price hikes or surcharges.”
At the same time, the report noted, “some held off raising prices because of customers’ growing price sensitivity, resulting in compressed profit margins.”
A recent Goldman Sachs analysis found that U.S. businesses have absorbed approximately two-thirds of the costs.
In a Truth Social post shortly after the inflation numbers, Trump stated that the numbers prove “tariffs have not caused inflation.”
“It has been shown that, for the most part, consumers aren’t even paying these tariffs, it is mostly companies and governments, many of them foreign, picking up the tabs,” he said.
Additional inflation data could support the president’s argument.
The Producer Price Index (PPI)—a metric of prices paid for goods and services by companies—and trade prices will be the next key inflation reports this week.
The June PPI was flat, while import prices rose 0.1 percent. Market forecasts suggest that wholesale inflation will climb 0.2 percent, and import prices will be unchanged.
What Drove Inflation in July?
If goods inflation did not cause a considerable jump in consumer prices, then what did?
“July’s faster core inflation was largely driven by hot increases of core services prices,” Adams said.
Services excluding energy rose 0.4 percent from June to July, with shelter “the primary factor in the all items monthly increase,” according to the Bureau of Labor Statistics.
The report also highlighted that transportation and medical services advanced 0.8 percent monthly.
Monetary policymakers generally view the services side of inflation—particularly supercore inflation, which excludes housing—as a more reliable indicator of future trends since it is more persistent and more challenging to reverse.
Typically, service inflation is stickier, and prices fluctuate less than those of goods. Services are also labor-intensive, meaning wages can lift service prices. Ultimately, services inflation is less volatile, making the data more reliable.
Looking to September
New CME FedWatch Tool data indicate that investors are overwhelmingly betting on a quarter-point interest rate cut at the September policy meeting.
The Federal Reserve has left the benchmark federal funds rate unchanged in a range of 4.25 to 4.5 percent since January. This is a key policy rate that influences business, consumer, and government borrowing costs.
Officials have advocated for a wait-and-see approach, extending policymakers more time to assess the tariff situation.
“Higher tariffs have begun to show through more clearly to prices of some goods, but their overall effects on economic activity and inflation remain to be seen,” Fed Chair Jerome Powell told reporters at the post-meeting press conference last month.
While the U.S. central bank maintains a dual mandate—maximum employment and price stability—market watchers say the Fed will likely weigh one side over the other heading into next month’s Federal Open Market Committee meeting.
“Despite the increase in core inflation, we expect the Fed to cut rates next month as they pay closer attention to the weakening labor market,” Jeffrey Roach, chief economist for LPL Financial, said in a note emailed to The Epoch Times.
In July, two dissenting votes supported a rate cut in response to weakening labor conditions.
Fed Gov. Christopher Waller, a leading candidate to replace Powell in May 2026, and Fed Vice Chair Michelle Bowman have said, for two months, that lower interest rates will prevent a further deterioration in the labor market.
The U.S. economy added a smaller-than-expected 73,000 new jobs in July, and the bureau reported combined downward revisions of 258,000 for May and June, the largest two-month downward adjustment since 1979.
In a separate social media post, Trump reiterated that Powell “must NOW lower the rate.”
“The damage he has done by always being too late is incalculable. Fortunately, the economy is sooo good that we’ve blown through Powell and the complacent Board,” Trump added.
Stock Market Hits Record High
U.S. stocks celebrated the better-than-expected inflation data as the numbers could support a September rate cut.
The blue-chip Dow Jones Industrial Average soared more than 400 points. The broader S&P 500 and the tech-driven Nasdaq Composite Index both rose about 1 percent to new intraday highs.
CIO of Northlight Asset Management Chris Zaccarelli said the financial markets are likely to maintain their upward trajectory.
“In this environment, stocks can continue to move higher, and it is going to take a much larger inflation number, or other shock to the market, for a correction to commence,” Zaccarelli said in a note emailed to The Epoch Times.
Absent a recession, it is difficult to pencil in a sell-off, he added.
According to LPL Financial’s Jeff Roach, the U.S. economy could be in for a “stagflation-lite period.”
Should consumer prices push higher in the coming months and the broader economy slows, a type of stagflation situation—an economic environment that mixes higher inflation, anemic growth, and rising unemployment—could unfold.
“Investors must come to grips with inflation above the Fed’s target amid a backdrop of slower growth, setting things up for stagflation-lite,” Roach said in a note emailed to The Epoch Times.
Despite a soft jobs report, the unemployment rate remains around 4 percent. Additionally, the Atlanta Fed’s GDPNow Model points to 2.5 percent growth in the third quarter.
