Economy remained stable with a 2.7% inflation rate in July amidst Trump's import tariffs
In a relief for the market, the US inflation rate for July remained steady at 2.7%, matching the June rate and lower than the anticipated 2.8%. This stability was achieved despite tariffs imposed by former President Donald Trump, which had initially raised concerns about inflationary pressures.
The Consumer Price Index (CPI) increased 0.2% month-over-month in July, with an annual inflation rate of 2.7% year-over-year, unchanged from June. The moderation in headline inflation can be attributed to several factors.
Energy prices notably fell 1.1% in July, with gasoline prices dropping 2.2%. Over the last 12 months, energy prices declined by 1.6%, offsetting inflation in other sectors. Although tariffs raised import duties on categories like household furnishings and recreational goods—causing those prices to rise—the effect was partially balanced by decreases in other categories such as lodging and communication.
Core inflation, which excludes food and energy, did rise to around 3.1% annually, indicating some sustained underlying price pressures. However, the moderation in headline inflation suggests that broader consumer and market adjustments to tariff-related costs over time have played a significant role.
The latest inflation reading comes amidst a campaign by Trump to pressure Fed chair Jay Powell into reducing interest rates. Following the data release, the two-year Treasury yield fell by 0.08 percentage points to 3.72%. Futures markets now estimate a 95% chance of a quarter-point cut at the next Fed meeting, up from 85% before the inflation data.
President Joe Biden announced his intention to reduce interest rates by as much as 3 percentage points. James Bullard, the former president of the St Louis Federal Reserve, said the July inflation data showed that the impact of tariffs was limited to "very muted effects that were one-time increases in the price level".
Some members of the Fed's rate-setting committee have argued that the impact of the levies on prices will be limited. However, Diane Swonk, chief economist and managing director at KPMG, stated that recent increases in US inflation, especially in import-reliant categories, show that "the tariffs have begun to bite".
The tariffs imposed by Trump have prompted warnings of potential increases in domestic prices. EJ Antoni, a loyalist from the rightwing Heritage Foundation, has been announced as Trump's choice to lead the BLS, pending US Senate confirmation. The data from the Bureau of Labor Statistics was released after Trump fired the head of the agency earlier this month.
The steady inflation rate in July, along with the President's intention to reduce interest rates, has led to expectations of a faster pace of rate cuts by the Federal Reserve. However, most members of the Fed's rate-setting committee have indicated a preference to hold off on any reduction in borrowing costs until the inflationary impact of tariffs becomes clear.
Meanwhile, 32% of small businesses plan to increase prices, according to the National Federation of Independent Business's small business optimism index from last month. The US dollar also decreased following the data release, indicating investors expect a faster pace of rate cuts by the Federal Reserve.
In conclusion, while tariffs have impacted prices in certain sectors, overall inflation in the US has remained relatively steady. The moderation in headline inflation suggests that broader consumer and market adjustments to tariff-related costs over time have played a significant role. The steady inflation rate, along with the President's intention to reduce interest rates, has led to expectations of a faster pace of rate cuts by the Federal Reserve. However, most members of the Fed's rate-setting committee have indicated a preference to hold off on any reduction in borrowing costs until the inflationary impact of tariffs becomes clear.
- The stability in the US inflation rate, despite tariffs, suggests that businesses and the general public are adapting to the new financial landscape, a sign that investing in US markets could remain a viable option for those sensitive to inflation.
- With President Joe Biden intending to lower interest rates and the Federal Reserve considering rate cuts due to the moderation in inflation, the landscape for both domestic and international finance and investing may shift, creating opportunities and challenges for business and politics alike.
