Tariffs have played a small role so far in rising inflation: 4 things we learned from the CPI report

The latest CPI report shows inflation at 2.7% annually, driven largely by base effects, with tariffs playing only a minor role thus far. While prices for some imported goods are rising and economists anticipate greater tariff-related inflation in July and August as pre-tariff inventories deplete, decelerating costs in housing/shelter and services, significant CPI components, have largely offset these increases. Future pass-through of tariff costs may also be limited by consumer resistance to price hikes.

Analysis

The latest Consumer Price Index (CPI) report indicates a complex inflationary environment where headline inflation has risen to a 2.7% annual rate, up from 2.4% in April, primarily due to base effects from lower prior-year readings rather than a broad acceleration. The direct impact of tariffs on the overall index remains limited, though there are initial signs of price increases in tariff-sensitive imported goods such as apparel, furniture, and appliances. Economists anticipate a more pronounced tariff-related inflationary effect in July and August as businesses exhaust their pre-tariff inventories. However, this potential upward pressure on goods inflation is currently being more than offset by significant disinflationary trends in the largest components of the CPI. Specifically, the rate of increase in shelter costs, which constitute 34% of the index, has slowed to 3.8% year-over-year from 5.2% a year prior. Similarly, the cost of services, accounting for 61% of the index, has decelerated to a 3.6% annual pace. The key uncertainty for the near-term inflation outlook is whether businesses will be able to pass on higher tariff-related costs to consumers, or if weak consumer demand will force companies to absorb these costs, thereby compressing profit margins.

Key Decisions for Investors

• Investors should closely monitor upcoming CPI and Producer Price Index (PPI) reports for evidence of accelerating goods inflation, as the suppressing effect of pre-tariff inventories is expected to wane in the coming months.
• Consider reviewing exposure to consumer discretionary sectors heavily reliant on imported goods, as these firms face potential margin pressure if skittish consumer demand prevents them from passing on higher tariff-related costs.
• The significant deceleration in shelter and services inflation, which are key drivers of core inflation, may provide the Federal Reserve with more policy flexibility, suggesting that a slight uptick in goods inflation alone may not trigger a more hawkish monetary stance.