The monthly gains for the overall and core CPI price indices increased about as expected, up by 0.2 percent for the overall measure and 0.3 percent for the core (excluding the volatile food and energy components). As a result, the 12-month trend rate for the overall CPI remained at 2.7 percent, while the trend core rate accelerated to 3.1 percent. Both of these inflation measures remain above the Fed's 2.0 percent long-term goal, although the Fed prefers to use the broader price index for personal consumption expenditures (PCE).
There are some signs of rising tariffs in these figures, although the pass-through has been only modest thus far. As tariff rates stabilize (at much higher levels than at any time in the post-War period) and inventories of pre-tariff goods diminish, it is expected that the tariff pass-through will increase -- boosting measured core inflation further in coming months.
As we have noted many times, the Federal Reserve has a dual mandate of stable prices and the lowest unemployment rate consistent with that price target. With the trend measure of core inflation more than 100 basis points above the goal, and increasing over the past several months, this could be a sign that the Fed could tighten monetary policy in coming months. But even though the unemployment rate remains low at 4.2 percent, the slowdown in nonfarm payroll employment gains (along with slower core GDP growth thus far this year) has increased concerns that the employment component of the Fed's dual mandate is slipping -- leading to financial markets expecting Fed easing. Before the next FOMC meeting in September, the July PCE inflation figures along with the August CPI figures will be released. The August employment report will also be released. Those inflation measures and the jobs numbers will be key in the Fed's interest rate decision. What will not be known for sure yet, however, is whether the pickup in prices is a one-time occurrence from tariffs or the start of a period of ongoing price gains. The Fed will have a difficult decision to make in September, unless the inflation and jobs data to be released between now and then paint a more decisive picture.
David W. Berson, Ph.D., CBE
Chief Economist
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