July 15, 2025

QuickTakes

Is Inflation Stuck At 3.0%

Because Of Trump's Tariffs?

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.

President Donald Trump is pushing for the Federal Reserve to cut the federal funds rate (FFR) from 4.33% to 1.00%. This reduction would lower net interest payments on the federal debt, helping to reduce the US budget deficit. A lower FFR could also weaken the dollar, boosting exports and reducing imports. However, Fed Chair Jerome Powell and most Federal Open Market Committee (FOMC) participants are reluctant to cut rates, especially to 1.00%, due to concerns that Trump's tariffs could hinder progress toward the Fed's 2.0% inflation target.

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.

Let's have a closer look at today's CPI data:

(1) CPI durable goods. The spike in consumer price inflation during 2021 and 2022 was led by soaring durable goods prices. When inflation subsequently moderated rapidly during late 2022 through 2024, durable goods prices mostly deflated. In recent months, many of them stopped falling (chart).

The durable goods CPI rose 0.1% m/m during June led by bigger increases in several categories that include lots of imports (chart). For example, appliance prices jumped 2.2%. There was a 0.7% drop in used car prices and a 0.3% decline in new vehicle prices. But both are likely to increase as Trump's 25% tariffs on imported cars, steel, aluminum, and copper hit the auto industry in the new model year.

(2) CPI nondurable goods. The nondurable goods CPI rose 0.5% m/m in June (chart). Again, some of the categories that rose at a faster clip might have been affected by Trump's tariffs. These include footwear, apparel, and prescription drugs.

The good news is that rent of shelter in the CPI continues to disinflate (chart). However, inflationary pressures from Trump's tariffs may continue to boost goods inflation, offsetting the disinflationary trend in rent inflation.

QuickTakes Archive

Contact us by email or call 480-664-1333.

Copyright (c) Yardeni Research, Inc. Please read complete copyright and hedge clause.