tariff inflation has arrived in the US

June’s inflation data showed the Consumer Price Index (CPI) rising 2.7% year-over-year, up from 2.4% in May and marking the fastest pace since February. It took several months, but the effects of the import tariffs introduced in April now appear to be materializing in the data. 

The recent numbers effectively confirm what many expected: businesses would eventually pass higher import costs on to consumers. As we previously noted, stockpiled inventory has helped to delay this impact, but that was always expected to be a short-term buffer. As those reserves are drawn down and as the trade war was recently reignited with a fresh round of tariff threats, firms may be becoming resigned to the reality of raising prices. Indeed, categories most exposed to tariffs, such as furniture, appliances, and other household supplies, posted the largest increases last month.

On the other hand, the release gave reasons to remain optimistic about the long-term path of inflation as well. While headline inflation rose, services inflation—the stickier, slower-moving segment that has been the primary driver of overall inflation in recent years—continues to cool meaningfully. Services inflation came in at 3.6% in June, down from 5.0% a year ago. Core services inflation has now cooled by half since the 6.2% reading in June 2023. 

There are also multiple signs that further deceleration in services inflation is likely. As calculated in the CPI, shelter costs tend to lag increases in market rent, the latter of which has been slowing nationwide. Per data from Costar, national annual rent appreciation fell from 1.6% in Q2 of 2024 to 0.9% last quarter, which can be expected to bring down the overall print in coming months.

Meanwhile, consumer spending is also showing signs of softening. According to the Commerce Department, household spending fell across multiple categories in May. Prices for airfares, often viewed as a useful gauge for broader discretionary spending, also fell last month.

This continued cooling in services inflation may serve as a moderating force in the months ahead, helping to offset tariff-related price shocks. It is worth noting that this is only the first inflation report to show the impact of tariffs. It likely has not captured the full extent of the April set, and certainly not any of the newly announced levies to go into effect in August.

The key questions that remain are whether the tariff shock proves to be a one-time price increase as some economists suggest, and whether a cooling services component will largely mitigate this impact. These two forces will be at play at both the July Federal Reserve meeting, where a rate hold is anticipated, and the September meeting, where expectations have shifted from a near-certain cut to a coin toss.