The tariff-driven inflation that economists feared begins to emerge

Globe and Mail

2 days ago

WASHINGTON (AP) — Inflation rose last month to its highest level since February as President Donald Trump's sweeping tariffs push up the cost of a range of goods, including furniture, clothing, and large appliances.
Consumer prices rose 2.7% in June from a year earlier, the Labor Department said Tuesday, up from an annual increase of 2.4% in May. On a monthly basis, prices climbed 0.3% from May to June, after rising just 0.1% the previous month.
Worsening inflation poses a political challenge for Trump, who promised during last year's presidential campaign to immediately lower costs only to engage in a whipsawed frenzy of tariffs that have left businesses and consumers worried. Trump has already declared that the U.S. effectively has no more inflation as he has attempted to pressure Federal Reserve Chair Jerome Powell into cutting short-term interest rates.
Yet the bump in inflation last month makes it more likely that the central bank will keep rates unchanged at the central bank's next meeting in two weeks. Powell has said that he wants to see how the economy reacts to Trump's duties before reducing borrowing costs.
Excluding the volatile food and energy categories, core inflation increased 2.9% in June from a year earlier, up from 2.8% in May. On a monthly basis, it picked up 0.2% from May to June. Economists closely watch core prices because they typically provide a better sense of where inflation is headed.
The uptick in inflation was driven by a range of higher prices. The cost of gasoline rose 1% just from May to June, while grocery prices increased 0.3%. Appliance prices jumped for the third straight month. Toys, clothes, audio equipment, shoes, and sporting goods all got more expensive, and are all heavily imported.
'You are starting to see scattered bits of the tariff inflation regime filter in,' said Eric Winograd, chief economist at asset management firm AllianceBernstein, who added that the cost of long-lasting goods rose last month, compared with a year ago, for the first time in about three years.
Winograd also noted that housing costs, one of the biggest drivers of inflation since the pandemic, has continued to cool, which is holding down broader inflation. The cost of rent rose 3.8% in June compared with a year ago, the smallest yearly increase since late 2021.
'Were it not for the tariff uncertainty, the Fed would already be cutting rates,' Winograd said. 'The question is whether there is more to come, and the Fed clearly thinks there is,' along with most economists.
Stock prices were mixed early, with the S&P 500 and Nasdaq indexes rising and the Dow Jones falling 154 points. Some investors were cheered by the fact that core prices rose less than forecast.
Some items got cheaper last month, including new and used cars, hotel rooms, and air fares. Travel prices have generally declined in recent months as fewer international tourists visit the U.S.
The report set up a broader political battle over Trump's tariffs, a fight that will ultimately be determined by how the U.S. public feels about their cost of living and whether the president is making good on his 2024 promise that his agenda would help the middle class.
The White House pushed back on claims that the report showed a negative impact from tariffs, since the cost of new cars were down despite the 25% tariffs on autos and 50% tariffs on steel and aluminum. The administration also noted that despite the June bump in apparel prices, clothing prices are still cheaper than they were three months ago.
'Consumer Prices LOW,' Trump posted on Truth Social. 'Bring down the Fed Rate, NOW!!!'
For Democratic lawmakers, the inflation report confirmed their warnings over the past several months that Trump's tariffs would push up inflation. Their argument on Tuesday was that the situation will likely get even more painful given the size of the tariff rates in the letters that Trump posted over the past week.
'For those saying we have not seen the impact of Trump's tariff wars, look at today's data. Americans continue to struggle with the costs of groceries and rent — and now prices of food and appliances are rising,' said Sen. Elizabeth Warren, D-Mass. "Families were already getting crushed, and the president's making it worse.'
Trump has imposed sweeping duties of 10% on all imports plus 30% on goods from China. Just last week the president threatened to hit the European Union with a new 30% tariff starting Aug. 1.
He has also threatened to slap 50% duties on Brazil, which would push up the cost of orange juice and coffee. Orange prices leaped 3.5% just from May to June, and are 3.4% higher than a year ago, the government said Tuesday.
Overall, grocery prices rose 0.3% last month and are up 2.4% from a year earlier. While that is a much smaller annual increase than before the pandemic, it is slightly bigger than the pre-pandemic pace of food price increases. The Trump administration has also placed a 17% duty on Mexican tomatoes.
The acceleration in inflation could provide a respite of sorts for Fed Chair Powell, who has come under increasingly heavy fire from the White House for not cutting the benchmark interest rate.
The Fed chair has said that the duties could both push up prices and slow the economy, a tricky combination for the central bank since higher costs would typically lead the Fed to hike rates while a weaker economy often spurs it to reduce them.
Trump on Monday said that Powell has been 'terrible' and 'doesn't know what the hell he's doing.' The president added that the economy was doing well despite Powell's refusal to reduce rates, but it would be 'nice' if there were rate cuts 'because people would be able to buy housing a lot easier.'
Last week, White House officials also attacked Powell for cost overruns on the years-long renovation of two Fed buildings, which are now slated to cost $2.5 billion, roughly one-third more than originally budgeted. While Trump legally can't fire Powell just because he disagrees with his interest rate decisions, the Supreme Court has signaled, he may be able to do so 'for cause,' such as misconduct or mismanagement.
Some companies have said they have or plan to raise prices as a result of the tariffs, including Walmart, the world's largest retailer. Automaker Mitsubishi said last month that it was lifting prices by an average of 2.1% in response to the duties, and Nike has said it would implement 'surgical' price hikes to offset tariff costs.
But many companies have been able to postpone or avoid price increases, after building up their stockpiles of goods this spring to get ahead of the duties. Other firms may have refrained from lifting prices while they wait to see whether the U.S. is able to reach trade deals with other countries that lower the duties.