Inflation saw an increase in June, influenced in part by companies passing customs fees onto consumers.
In light of this rise, President Trump is advocating for the Federal Reserve to lower interest rates. While this could stimulate market activity and investments, it also carries the risk of further increasing inflation.
A potential clash looms between Trump and Federal Reserve Chairman Jerome Powell as tariff-related inflation emerges as a growing narrative in the economy. Treasury Secretary Scott Bescent mentioned on Tuesday that a “formal process” is underway to choose Powell’s successor.
Trump’s economic strength played a crucial role in his return to the White House. If inflation escalates due to his tariffs, the administration could lose control over its economic narrative, which may have significant implications for the upcoming midterm elections.
Let’s delve deeper into the June inflation report and its political implications.
The report aligns with expectations
The 2.7% increase reported on Tuesday by the labor sector aligns well with forecasts, as economists had predicted an inflation rise of 3% from a previous annual increase of 2.6%.
Inflation has been on the upswing for two consecutive months, following increases of 2.4% in May and 2.3% in April.
While key asset management strategist Sheemasher anticipated a “softer than expected” figure, many economists noted that their predictions were met.
“The Headline Consumer Price Index (CPI) has risen in accordance with forecasts,” stated Eugenio Aleman, chief economist for Raymond James, in a memo.
The “core” CPI, excluding food and energy, saw a larger than anticipated increase of 2.9% annually compared to the expected 3%, up from 2.8% the previous month.
Tariffs may drive price hikes
For months, economists have cautioned that Trump’s import taxes may be reflected in higher consumer prices.
They highlighted various CPI categories affected, including fruits, furniture, recreational items, home appliances, as well as audio and video products.
“We’re observing signs of tariff-induced inflation in several areas, particularly in appliances and furniture,” noted Ol Sonora, an economist at Fitch. “This trend could accelerate in the coming months.”
Shah echoed these sentiments.
“The import taxes are gradually being reflected,” she mentioned in her commentary.
Aleman pointed out that the food sector is also feeling the impact of tariffs.
“Pricing for fruits, vegetables, and non-alcoholic beverages might spike significantly this month due to tariffs,” he indicated.
Not all linked to customs fees
The CPI represents a broad spectrum of goods and services, with a large portion not directly influenced by tariff rates.
The Labor Bureau reported that shelter costs were the “main contributors” to the rise in June’s inflation, with imported raw materials affecting construction costs. However, shelter costs are also sensitive to other factors, like short-term interest rates set by the Federal Reserve.
While the Fed continues to raise interest rates anticipating tariff-related inflation, this does not solely apply to costs passed on directly to consumers.
Interestingly, vehicle prices dropped by 0.3% in June, despite being significantly impacted by tariffs. Both new and used car prices saw reductions, as auto companies had preemptively decreased orders before the tariffs took effect, prompting dealers to lower prices to clear inventory.
Excluding vehicles, durable goods jumped 0.8% over the past three months and increased by 5.8% annually.
“[It’s] Preston Caldwell, chief US economist at Morningstar, remarked in his analysis.
“Prices for electrical appliances, various household items, and select electronics have risen sharply.”
Reasons for delayed price reflection
Trump’s trade war began shortly after he took office with most tariffs on his new “Mutual” announced in early April, raising questions about why it took so long for these changes to appear in the CPI.
One factor is the stockpiling of goods. Both consumers and businesses stocked up prior to the tariffs being announced.
Households made significant purchases early in the year—especially cars—while importers had aggressively drawn down their orders, which impacted the gross domestic product in the first quarter.
Additionally, Trump postponed the implementation of many of the tariffs initially announced, using them as leverage in negotiations. Tariffs that were set to be enacted were delayed for 90 days in early April, with many pushed back to August 1.
Moreover, several of Trump’s tariffs target components rather than finished goods. As final products are developed, the additional costs from tariffs take longer to affect consumer prices.
“Most of our imports are not consumer goods, but inputs for US manufacturers, such as raw materials and parts,” explained Ryan Young, a senior economist at the Competitive Enterprise Institute. “It takes time for these prices to filter through the supply chain to consumer goods.”
Political tensions and economic narratives
On Tuesday, Trump once again criticized the Fed for not lowering interest rates.
“Consumers are struggling. Cut the Fed rates now!” the president stated.
He suggested that the Fed should reduce rates by a total of 3 percentage points, which could potentially be the most significant cut in history.
As Powell indicated, the central bank hasn’t specifically curtailed Trump’s tariff policies. This creates a fundamental disagreement between the Federal Reserve and the White House regarding monetary policy.
A significant leadership move is underway to replace Powell, which may profoundly compromise the long-held independence of the US Central Bank.
Bescent confirmed on Tuesday that a “formal process” is in motion to find Powell’s successor, whose term will end next year.
