WASHINGTON — U.S. inflation remained steady in July, but a key underlying measure accelerated to its fastest annual pace since February, signaling that President Trump’s wide-ranging tariffs are increasingly filtering into retail prices.
The Consumer Price Index rose 2.7% in July from a year earlier, matching June’s pace, according to Bureau of Labor Statistics data released Tuesday. On a monthly basis, CPI increased 0.2%. But “core” inflation, which excludes food and energy, rose 0.3% from June and 3.1% year over year, one of the largest monthly increases this year and the highest annual reading in five months.
The report shows that after months of absorbing higher import costs, U.S. companies are beginning to pass more of those expenses on to customers. Categories most affected include household furnishings and supplies, up 0.7% in July; infants’ and toddlers’ apparel, up 3.3%; and footwear, up 1.4%. Airline fares jumped 4% after several months of declines, and used car and truck prices rose 0.5%.
Appliance prices, however, fell 0.9% after a 1.9% spike in June, highlighting the uneven impact of tariffs across categories. Lower energy costs helped keep overall inflation in check, with gasoline down 2.2% from June and 9.5% from a year earlier.
Retailers have been slow to pass through tariff-related increases, relying on strategies such as stockpiling inventory before duties took effect and absorbing some costs to protect demand. But economists warn that those buffers are wearing thin. The latest and most sweeping tariffs, levies of 10% to 50% on dozens of countries that failed to reach trade agreements with the U.S., took effect on August 7 and are not yet reflected in the data. Barclays projects core inflation could climb to 3.7% by year’s end.
The inflation report arrives against a backdrop of slowing job growth and heightened expectations for Federal Reserve rate cuts in September. July payrolls rose by just 73,000, with unusually large downward revisions totaling 258,000 for May and June. Investors now see a greater than 90% chance the Fed will lower rates next month.
Speaking in Chicago on Tuesday, Richmond Fed President Tom Barkin said “the fog is lifting” on the economic outlook following recent tax and trade policy moves, but acknowledged uncertainty over whether the central bank should prioritize controlling inflation or supporting the labor market. “We may well see pressure on inflation, and we may also see pressure on unemployment, but the balance between the two is still unclear,” Barkin said. “As the visibility continues to improve, we are well positioned to adjust our policy stance as needed.”
Barkin observed that American consumers are displaying signs of mounting stress, but emphasized that for the economy to decline significantly, consumer spending would probably have to decrease more substantially.
That balance is critical for retailers navigating tighter consumer budgets and rising input costs. Many shoppers are becoming more selective, cutting discretionary purchases while continuing to spend on essentials. For sectors such as apparel, footwear, and home goods, which are already feeling the pinch from tariffs, the Fed’s next move could influence both borrowing costs and consumer sentiment heading into the holiday season.
