US inflation picks up in June as early tariff effects start to show

Business Standard

2 days ago

US consumer prices increased by the most in five months in June amid higher costs for some goods, suggesting tariffs were starting to have an impact on inflation and potentially keeping the Federal Reserve on the sidelines until September.
Softening demand as consumers hunker down, however, is limiting price increases for services like airline fares and hotel and motel rooms, keeping underlying inflation muted for now. That trend, if sustained, could ease concerns of a broad-based rise in price pressures from tariffs.
Nonetheless, economists generally expect the tariff-induced rise in inflation to become more evident in the July and August CPI reports, arguing that businesses were still selling merchandise accumulated before President Donald Trump announced sweeping import duties in April. They also noted that when Trump slapped tariffs on washing machines in 2018, it took several months for the duties to show up in the inflation data.
Trump last week announced higher duties would come into effect on August 1 for imports from a range of countries, including Mexico, Japan, Canada and Brazil, and the European Union.
"Inflation has begun to show the first signs of tariff pass-through," said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. "While services inflation continues to moderate, the acceleration in tariff-exposed goods in June is likely the first of greater price pressures to come.
The Fed will want to hold steady as it awaits more data." The CPI increased 0.3per cent last month after edging up 0.1per cent in May, the Labor Department's Bureau of Labor Statistics said on Tuesday. That gain was the largest since January, and also reflected higher rental costs. Gasoline prices rebounded 1.0per cent after four straight monthly declines.
Food prices rose 0.3per cent, matching the increase in May. Grocery store prices also advanced 0.3per cent, lifted by a 1.4per cent increase in the costs of nonalcoholic beverages and 2.2per cent jump in coffee prices, likely because of higher import duties.
Fruits and vegetables cost 0.9per cent more while beef prices jumped 2.0per cent. But eggs were 7.4per cent cheaper as an avian flu outbreak abated. The cost of food consumed away from home rose 0.4per cent.
In the 12 months through June, the CPI advanced 2.7per cent after rising 2.4per cent in May. Economists polled by Reuters had forecast the CPI would climb 0.3per cent and rise 2.6per cent on a year-over-year basis.
The US central bank tracks Personal Consumption Expenditures (PCE) Price Index data for its 2per cent target. The Fed is expected to leave its benchmark overnight interest rate in the 4.25per cent-4.50per cent range at a policy meeting later this month. Minutes of the central bank's June 17-18 meeting, which were published last week, showed only "a couple" of officials said they felt rates could fall as soon as the July 29-30 meeting.
CPI inflation readings came in on the low side in February through May, leading to demands by Trump for the Fed to lower borrowing costs. Trump persisted on Tuesday, writing on his Truth Social media platform, "Consumer Prices LOW. Bring down the Fed Rate, NOW!!"
Stocks on Wall Street were mixed. The dollar rose against a basket of currencies, hitting a 15-week high versus the Japanese yen. US Treasury yields rose.
TAME UNDERLYING INFLATION
Excluding the volatile food and energy components, the CPI rose 0.2per cent in June. The so-called core CPI edged up 0.1per cent in the prior month. Despite the moderate gain, there were some solid increases in tariff-sensitive goods. Prices of household furnishings and supplies shot up 1.0per cent, the largest advance since January 2022, after climbing 0.3per cent in May. There was a record 4.2per cent jump in the prices of window and floor coverings and other linens.
Prices for appliances surged 1.9per cent, the biggest rise since August 2020, while the cost of apparel rebounded 0.4per cent. Sporting goods prices accelerated 1.4per cent while toys vaulted 1.8per cent, the most since April 2021. But those rises were partially offset by a 0.7per cent decline in the cost of used cars and trucks. New motor vehicle prices fell 0.3per cent for a second straight month.
Core goods prices rose 0.2per cent after being unchanged in May.
Owners' equivalent rent of primary residence rose 0.3per cent, but the cost of hotel and motel rooms declined 3.6per cent. Airline fares dipped 0.1per cent. Healthcare costs increased 0.5per cent, driven by a 1.3per cent rise in dental services, which was the biggest gain in three years. There were also increases in hospital services and prescription medication.
The costs of services excluding energy services increased 0.3per cent after gaining 0.2per cent in May.
A slowing labor market, which is curbing wage growth, is also contributing to keeping services inflation in check. The overall core CPI inflation increased 2.9per cent in the 12 months through June after rising by 2.8per cent for three straight months.
"If the recent tariffs threatened for August 1 go into effect, it will take a few months for that additional boost to inflation to be felt in goods prices and will keep the Fed on the sideline unless the labor market takes a sudden turn for the worse," said Ryan Sweet, chief US economist at Oxford Economics.
Goldman Sachs is forecasting monthly core CPI inflation increases of between 0.3per cent-0.4per cent over the next few months, reflecting tariff-related increases in the prices of consumer electronics, autos and apparel. The investment bank expects limited near-term impact on core services inflation.
Based on the CPI data, economists estimate core PCE increased 0.3per cent in June after rising 0.2per cent in May. Core PCE inflation was forecast to have advanced 2.8per cent on a year-over-year basis last month after climbing 2.7per cent in May.
Those estimates could change after the release on Wednesday of producer price data, but some economists are hopeful that weakening demand will limit the scope for businesses to pass on tariffs to consumers.
"With consumers becoming more cautious about spending and the job market starting to lose some momentum, the recent price increases are expected to be gradual rather than dramatic," said Sung Won Sohn, a finance and economics professor at Loyola Marymount University.