More tariff costs are being passed on to consumers

At her alterations business, Skirting the Rules in Detroit Lakes, owner Nikki Caulfield is seeing some indirect effects from tariffs.

The costs of the materials and supplies she buys have stayed stable. However, she sees the price tags on clothing that people bring in for alterations, and those have bigger numbers on them these days.

"We can see it clearest with prom dresses and the price tags that are on them when they come in here," she said. "As far as I'm aware, pricing has gotten a little bit more expensive."

Companies are starting to pass along more of their tariff costs to customers, according to a new analysis from the Federal Reserve Bank of Minneapolis.

Looking at data from July, researchers estimated that core inflation, which excludes food and energy, came in at 3.3 percent year-over-year, higher than it would have been without tariffs. By their calculation, it was up to 0.4 percentage points higher.

That was a change from their assessment in April.

"Now with the benefit of four or five months of more data, we are seeing a clearer imprint from tariffs," said Neil Mehrotra, an economist at the Minneapolis Fed.

Mehrotra made his remarks before the Federal Reserve's blackout period, which precedes policy meetings.

Where tariffs are hitting prices most visibly

To assess the impact of tariffs, Mehrotra and his co-author Michael Waugh compared how much prices would rise if businesses passed on all of their tariff costs with how much they actually rose using pre-pandemic inflation figures as a baseline.

Some industries passed on the costs more than others.

For example, women's and girls' clothing saw excess inflation over the last year of 4.66 percent, which is fairly close to researchers' predicted tariff effect of 4.77 percent.

But household supplies went through almost no inflation above their pre-pandemic average, despite a predicted tariff effect of 1.63 percent.

"It could be that they don't feel the ability to pass through those price increases, so they're seeing lower profits," he said. "It could be that they're substituting to different suppliers to avoid the tariffs, or it could be that they're finding ways to be more productive to offset the cost of higher tariffs."

AI Boom also driving inflation

Mehrotra and Waugh also looked at inflation driven by the AI boom.

They note that prices for video and information processing equipment, like memory chips, were up 12.2 percent from July 2025 to July 2026. From 2015-2019, prices for those goods were falling by 6.5 percent each year.

"That category is adding on its own about 0.4 percentage points to core inflation, and so it's on the same order of magnitude as tariffs," he said.

Reports like these help inform the Federal Open Market Committee, which is meeting next week to set the Federal Reserve's benchmark interest rate.

In a split vote, it held rates steady in July, with Minneapolis Fed President Neel Kashkari dissenting. He wanted a rate increase, citing high inflation due, in part, to the Iran war and tariffs.

Other costs rising, too

Back at Skirting the Rules, owner Nikki Caulfield said it's not the rising costs of imported goods that are raising her prices, but everything else.

The store's electric and water bills are up, and those costs have to get passed to consumers.

And as the owner of a small business who needs to pay herself, Caulfield said when her personal costs increase, like gasoline or groceries, her prices have to compensate for that, too.

She already has thin margins, she said.

"It is not a business you get into if you want to be rich," she said. "Sometimes I really wonder why I'm doing this."

Distributed by Newsbank, inc.