CPI report reveals inflation held steady in July as tariffs threatened wider impact
Inflation held steady in July as President Donald Trump’s sweeping import tariffs took a toll on some U.S. consumer prices.
An underlying inflation measure accelerated more than expected as prices of some goods typically imported from China, such as furniture and video and audio products, rose sharply. Others, including apparel and toys, moved up more modestly.
Some economists said the numbers won't be enough to keep the Federal Reserve from cutting interest rates next month.
Prices overall increased 2.7% from a year earlier, similar to June, according to the Labor Department’s consumer price index, a measure of average changes in goods and services costs.
On a monthly basis, costs increased 0.2% after rising 0.3% the month before.
What is the meaning of core inflation?
But core inflation, which excludes volatile food and energy items and is watched closely by the Federal Reserve because it better reflects longer-term trends, increased 0.3% - a six-month high - after rising 0.2% in June. That nudged the annual increase from 2.9% to 3.1%, the highest since February.
The cost of goods likely to be affected by tariffs turned in a mixed showing. Furniture prices increased 0.9% and video and audio products rose 0.8%. But apparel ticked up just 0.1% and toys were up 0.2%.
“Some monthly variation in price changes is normal and it remains the case that prices have risen the most since January for goods that are primarily imported,” economist Sam Tombs of Pantheon Macroeconomics wrote in a note to clients.
Will the Fed cut rates in September?
Although core inflation picked up, the effect on imported goods was measured, and some economists said the moderate tariff impact won't keep the Fed from lowering interest rates in September.
"Although core annual inflation is back to its highest level since February, today’s CPI print is not hot enough to derail the Fed from cutting rates in September," said Seema Shah, chief global strategist at Principal Asset Management. "There is some sign of tariff pass-through to consumer prices but, at this stage, it is not significant enough to ring alarm bells."
With the labor market seemingly on solid footing, Fed Chair Jerome Powell hinted last month that officials could wait until later in the year to lower rates to assess the effects of the tariffs. The central bank slashed rates by a percentage point late last year but has paused since December.
After a dismal jobs report revealed just 73,000 payroll gains in July and historically large downward revisions for the preceding two months, Fed funds futures markets raised the odds of a September rate cut to 86%. A report on employment in August, due out in early September, could determine the Fed's decision.
The Fed raises rates, or keeps them higher for longer, to fight inflation and lowers them to stimulate a weak economy. Tariffs are expected to both raise inflation and hobble growth, posing a dilemma for the central bank as it determines which challenge is more formidable.
Why are gas prices declining?
Gasoline prices fell 2.2%, the fifth drop in the past six months, and are down 9.5% over the past year. Regular unleaded averaged $3.14 a gallon on Aug. 11, down from $3.16 a month ago and $3.45 a year ago, according to AAA.
Oil prices have fallen this year on concerns the trade war will hurt the global economy and because of increased oil production by OPEC countries. That has led gas prices lower.
Are rents falling in the US?
Average rent increased 0.3%, pushing down the annual increase to 3.5%, the smallest since December 2021. Lower rents for new leases are finally pulling down rates for existing tenants.
Housing costs have been the biggest inflation driver, making up 35% of overall price increases in July.
Other service costs also increased sharply. Airline fares jumped 4% after falling for several months. Medical care costs rose 0.8% and car maintenance and repair bills rose 1%.
But car insurance costs, which generally have surged since the pandemic, edged up just 0.1%, and hotel rates fell 1%.
Are grocery prices increasing or decreasing?
Grocery costs dipped 0.1% after a 0.3% increase the previous month.
Egg prices tumbled 3.9%, continuing a decline amid the easing of a bird flu outbreak that had caused prices to soar. Other staples also got less expensive, with breakfast cereal prices down 0.7%; rice off 0.6%; chicken, 0.4%; and fresh fish and seafood, 0.5%.
Some other items got pricier: Uncooked ground beef rose 2.4%, bacon was up 0.6%, and bread rose 0.4%.
Do tariffs increase inflation?
Inflation has been pulled by conflicting forces this year. On the one hand, services prices that soared after the COVID-19 pandemic have climbed more modestly or drifted lower.
Rent increases, for example, have softened. Wage increases have slowed as pandemic-related labor shortages eased. And Americans grappling with higher inflation have reined in their spending on travel and recreational activities, which has lowered airfares and hotel rates.
Absent the tariffs, yearly inflation probably would already be at the Fed’s 2% goal, economists have said.
But the tariffs, which had minimal effects on consumer prices through the first five months of 2025, began delivering a bigger blow in June. Forecasters expect a growing impact on the cost of goods over the next few months.
Duties already in effect for weeks or months include a 30% tax on Chinese imports, 50% on steel and aluminum, and 25% on foreign cars. The average U.S. tariff rate has jumped from less than 3% in January to 15% to 20%.
Retailers and manufacturers have cushioned the hit to consumers by stocking up on inventory before the fees took effect and absorbing some cost increases themselves, among other strategies. But economists say those tactics have largely played out.
Meanwhile, the White House has reached deals with trading partners such as Japan, South Korea, Vietnam and the UK that set tariffs at 10% to 20%. On Aug. 7, Trump imposed levies of 10% to 50% on dozens of countries that didn’t reach agreements with the United States. In other words, the most far-reaching charges are looming.
By year’s end, Barclays expects overall inflation to reach 3.4% while the core reading hits 3.7%.
This story has been updated with new information.