Inflation speeds up as tariffs start to leave a mark on the economy

Consumer prices ticked up more than expected in June, reigniting concerns that trade policy may be doing what months of wage growth and sticky housing costs couldn’t: pushing inflation out of the Fed’s comfort zone.

The latest Consumer Price Index, released Tuesday morning, showed a 0.3% rise in prices last month — triple May’s 0.1% pace and the largest monthly gain since January. On an annual basis, inflation is now running at 2.7%, up from 2.4% in May — slightly hotter than the 2.6% annual gain that economists had penciled in for June. Core CPI, which excludes volatile food and energy prices, rose 0.2% month-over-month and 2.9% over the past year, in line with forecasts.

The details of the report paint a more nuanced — and more complicated — picture. Shelter costs remain sticky and continue to account for over two-thirds of the monthly gain in core inflation. Gas prices ticked up, too. But more significantly, there are early signs of the impact of President Donald Trump’s tariffs: Consumer goods from toys to appliances are quietly becoming more expensive, potentially foreshadowing what’s to come when the president’s newly promised tariffs on imports take effect starting August 1.

And with Trump threatening a broader tariff escalation, economists will be closely watching July and August’s inflation data for signs of an even broader ripple effect.

While a summer of rising gasoline prices and persistent housing costs likely played a role, the key shift appears to be tariff-related. Import-heavy categories such as furniture, electronics, and household goods saw notable increases, a possible reflection of levies being passed along to consumers. Notably, food prices rose 0.3%, with coffee and citrus fruit categories seeing some of the biggest monthly jumps. Services inflation — particularly in areas such as medical care and insurance — remained firm, underscoring the persistent price pressures that the Federal Reserve has been closely monitoring.

The inflation pickup comes at a delicate moment for the Fed. Markets had been pricing in rate cuts as early as September, and political pressure has intensified, particularly from Trump, who has urged the Fed to start easing now. But June’s data could offer little support for that path. With core inflation showing no clear signs of settling back toward the Fed’s 2% target, central bankers may be forced to hit pause on rate-cut hopes — yet again.

Not everything moved in the same direction. Airline fares and lodging dipped in June, and used car prices — a major inflation culprit in 2021 and 2022 — fell another 0.7%, continuing a multimonth slide. But the bigger picture is that headline and core inflation are both drifting in the wrong direction from the Fed’s perspective. The report isn't a blowout one, but it isn’t the cooling trend the Fed was likely hoping for, either.

In public comments, Fed officials have emphasized patience, preferring to see a few more months of clear disinflation before moving on rates. The June data may reset that clock. “We’re not yet at the point where we can say with confidence that inflation is sustainably moving toward 2%,” Fed Governor Lisa Cook said last week. This latest report could harden that view.

For consumers, the data’s implications are twofold: Higher borrowing costs may stick around longer, and everyday goods could get more expensive as trade policy bites. For businesses, especially import-heavy sectors such as retail and manufacturing, tariff-related inflation could complicate margins and supply chains just as many were starting to breathe more easily.

Markets reacted swiftly. Treasury yields climbed on the news, while futures traders dialed back their expectations for a September cut. Looking ahead, July’s data could prove even more telling. The Fed’s preferred inflation gauge — the Personal Consumption Expenditures (PCE) index — will be released later this month, and it could offer a more comprehensive view of underlying pressures.

“If it’s true that inflation is staying in check, then the Fed can go ahead and cut interest rates — potentially as early as September — but if subsequent reports show a different story, then the Fed is going to have to stay on hold even longer,” said Chris Zaccarelli, the chief investment officer for Northlight Asset Management.

With just three Fed meetings left on this year’s calendar, policymakers are caught in a tightening vise: cut too soon and risk reigniting inflation, wait too long and risk choking a cooling economy. The margin for error seems to be shrinking — fast.