Key inflation gauge sped up in July as companies grappled with tariffs

NEW YORK - A key measure of underlying inflation rose in July as businesses grappled with President Donald Trump's tariffs, although the overall increase was most likely not significant enough to deter the Federal Reserve from lowering interest rates at its next meeting.

The consumer price index stayed steady at 2.7% compared with the same time last year. On a monthly basis, prices rose 0.2% from June. But an important gauge tracking consumer prices that strips out volatile food and energy prices accelerated more rapidly.

"Core" CPI, which is closely watched by the central bank, jumped 0.3% over the course of the month, or 3.1% year over year. That is one of the largest monthly increases so far this year and the fastest annual pace in five months. In June, core inflation rose 0.2% from the previous month, or 2.9% from June 2024.

The July data, which was released by the Bureau of Labor Statistics, provides a clear sign that businesses are being affected by tariffs. Some have begun to pass along those related costs more readily to their customers after a prolonged period of muted price gains. Still, the inflation data came in more or less as expected, suggesting the central bank can move ahead with plans to soon restart interest rate cuts, which it put on hold in December.

"The economy is weaker because of tariffs," said Stephen Stanley, chief U.S. economist at Santander. "Businesses are being very cautious. They're not investing and they're not hiring," he added, noting that consumers were also pulling back in the face of higher prices.

U.S. companies that import products have largely been able to hold off raising prices despite a 10% tariff that has been in place on all imports since April, along with higher levies on steel, aluminum and products from China and Canada. Trump's more punishing tariffs on individual countries went into effect Thursday and so were not reflected in the July data.

Businesses have managed to avoid passing along price increases because of a strategy earlier in the year to stockpile goods that were likely to be subject to Trump's levies. Many companies have also sought to absorb the costs themselves to avoid driving away customers, some of whom are increasingly under financial strain.

But the July data showed more businesses reaching a tipping point, left with little option but to raise prices after June's notable uptick. Services inflation accelerated in July, posting the largest monthly gain since the start of the year after energy costs were stripped out.

Stanley warned that Trump's tariffs were high enough that prices across most categories would have to go up. For companies, he said, "it's just a matter of when and how do I do it?"

The biggest impact has so far been concentrated in categories such as furniture, appliances and other household wares, as well as recreation goods and footwear.

In July, the broader household furnishings index rose 0.7% from the previous month, after a 1% increase in June. Compared with the same time last year, those prices were up 2.4%. Recreation-related prices rose 0.4%. Some of the larger gains in July came in apparel and footwear, categories that are exposed to tariffs on countries around the world, including India, Vietnam and China. Prices on infant and toddler apparel were up 3.3% in July. Footwear was up 1.4%.

Airfares rose 4% in July after several months of declines. Hotel-related expenses continued to be muted, however.

New and used vehicle price increases have stayed relatively subdued as carmakers have shielded their customers from Trump's duties rather than forcing them to bear the brunt of the higher costs. That changed in July, with used car and truck prices rising 0.5%. New vehicle prices, however, were flat for the month.