The tariff-driven inflation that economists feared begins to emerge

Inflation in the United States rose last month to its highest level since February as sweeping tariffs push up the cost of everything, from groceries and clothes to furniture and appliances.

Consumer prices rose 2.7 per cent in June from a year earlier, the US Department of Labor said on Tuesday, up from an annual increase of 2.4 per cent in May. On a monthly basis, prices climbed 0.3 per cent from May to June, after rising just 0.1 per cent the previous month.

Worsening inflation poses a political challenge for US President Donald Trump, who, as a candidate, promised to immediately lower costs, but instead has engaged in a whipsawed frenzy of tariffs that have jolted businesses and consumers.

Trump insists that the US effectively has no inflation, as he has attempted to pressure Federal Reserve Chair Jerome Powell into cutting short-term interest rates.

Yet the new inflation numbers make it more likely that the central bank will leave rates where they are. Powell has said that he wants to gauge the economic impact of Trump’s tariffs before reducing borrowing costs.

Excluding volatile food and energy, core inflation increased 2.9 per cent in June from a year earlier, up from 2.8 per cent in May. On a monthly basis, it picked up 0.2 per cent from May to June. Economists closely watch core prices because they typically provide a better sense of where inflation is headed.

The uptick in inflation was driven by a range of higher prices. The cost of gasolene rose 1 per cent just from May to June, while grocery prices increased 0.3 per cent. Appliance prices jumped for the third straight month. Toys, clothes, audio equipment, shoes, and sporting goods all got more expensive, and are all heavily imported.

“You are starting to see scattered bits of the tariff inflation regime filter in,” said Eric Winograd, chief economist at asset management firm AllianceBernstein, who added that the cost of long-lasting goods rose last month, compared with a year ago, for the first time in about three years.

Winograd also noted that housing costs, a big inflation driver since the pandemic, have continued to cool, actually holding down broader inflation. The cost of rent rose 3.8 per cent in June compared with a year ago, the smallest yearly increase since late 2021.

“Were it not for the tariff uncertainty, the Fed would already be cutting rates,” Winograd said. “The question is whether there is more to come, and the Fed clearly thinks there is,” along with most economists.

Some items got cheaper last month, including new and used cars, hotel rooms, and airfares. Travel prices have generally declined in recent months as fewer international tourists visit the US.

A broader political battle over Trump’s tariffs is emerging, a fight that will ultimately be determined by how the US public feels about their cost of living and whether the president is making good on his 2024 promise to help the middle class.

The White House pushed back on claims that the report showed a negative impact from tariffs, since the cost of new cars fell despite the 25 per cent tariffs on autos and 50 per cent tariffs on steel and aluminium. The administration also noted that despite the June bump in apparel prices, clothing prices are still cheaper than three months ago.

For Democratic lawmakers, the inflation report confirmed their warnings over the past several months that Trump’s tariffs could reignite inflation. They said on Tuesday that it will only become more painful, given the size of the tariff rates in the letters that Trump posted over the past week.

“For those saying we have not seen the impact of Trump’s tariff wars, look at today’s data. Americans continue to struggle with the costs of groceries and rent — and now prices of food and appliances are rising,” said Senator Elizabeth Warren, D-Massachusetts.

Many businesses built up a stockpile of goods this spring and were able to delay price hikes, while others likely waited to see if the duties would become permanent.

More businesses now appear to be throwing in the towel and passing on costs to consumers, including Walmart, the world’s largest retailer, which has said it raised prices in June. Automaker Mitsubishi said last month that it was lifting prices by an average of 2.1 per cent in response to the duties, and Nike has said it would implement “surgical” price hikes.

Powell said last month that companies up and down the supply chain would seek to avoid paying tariffs, but that, ultimately, some combination of businesses and consumers would bear the cost.

“There’s the manufacturer, the exporter, the importer, the retailer and the consumer, and each one of those is going to be trying not to be the one to pay for the tariff,” the Fed chair said.

“But together, they will all pay for it together — or maybe one party will pay it all. But that process is very hard to predict, and we haven’t been through a situation like this.”

Trump has imposed sweeping duties of 10 per cent on all imports, plus 30 per cent on goods from China. Last week, the president threatened to hit the European Union with a new 30 per cent tariff, starting August 1.

He has also threatened to slap 50 per cent duties on Brazil, which would push up the cost of orange juice and coffee. Orange prices leaped 3.5 per cent just from May to June, and are 3.4 per cent higher than a year ago, the government said on Tuesday.

Overall, grocery prices rose 0.3 per cent last month and are up 2.4 per cent from a year earlier. While that is a much smaller increase than after the pandemic, when inflation surged, it is slightly bigger than the pre-pandemic pace. The Trump administration has also placed a 17 per cent duty on Mexican tomatoes.

Families have cut spending on food as prices rise. Cassidy Grom, 29, her husband, and his mother are eating out less and try to stretch grocery store rotisserie chickens as far as possible, using them in salads and the bones for soup.

“It feels like a miracle if I’m able to leave the grocery store without spending US$100,” the Edison, New Jersey resident said. “We’re trying to save for a house, we’re trying to save for a family, so prices are really on our mind.”

Accelerated inflation could provide a respite for Powell, who has come under withering fire from the White House over interest rates.

The Fed chair has said that the duties could both push up prices and slow the economy, a tricky combination for the central bank, since higher costs would typically lead the Fed to hike rates, while a weaker economy often spurs it to reduce them.

AP