By CHRISTOPHER RUGABER AP Economics Writer
WASHINGTON (AP) — U.S. inflation was unchanged in July as rising prices for some imported goods were balanced by falling gas and grocery prices, leaving overall prices modestly higher than a year ago.
Consumer prices rose 2.7% in July from a year earlier, the Labor Department said Tuesday, the same as the previous month and up from a post-pandemic low of 2.3% in April. Excluding the volatile food and energy categories, core prices rose 3.1%, up from 2.9% in June. Both figures are above the Federal Reserve’s 2% target.
The figures suggest that slowing rent increases and cheaper gas are offsetting some impacts of President Donald Trump’s sweeping tariffs. Many businesses are also absorbing much of the cost of the duties. Tuesday’s figures likely include some impact from the 10% universal tariff Trump imposed in April, as well as higher duties on countries such as China and Canada.
The figures still leave the Federal Reserve in a difficult spot: Hiring slowed sharply in the spring, after Trump announced tariffs in April. The stalling out of job gains has boosted financial market expectations for an interest rate cut by the central bank, and some Fed officials have raised concerns about the health of the job market. A rate cut by the Fed often, but not always, lowers borrowing costs for mortgages, car loans, and business loans.
Economists are divided over how Fed officials will read the data in the coming months. Some argued that the worsening jobs picture will outweigh lingering inflation concerns and lead the Fed to cut at its next meeting in September. Yet some say that with core inflation notably above 2% and rising, the Fed will hold off on reducing borrowing costs.
Chair Jerome Powell has warned that worsening inflation could keep the Fed on the sidelines — a stance that has enraged Trump, who has defied traditional norms of central bank independence and demanded lower borrowing costs.
On Tuesday, Trump attacked Powell again for not cutting rates and suggested he would allow a lawsuit against the Fed to proceed because of the rising costs of its extensive building renovation. It wasn’t clear what lawsuit he was referring to.
On a monthly basis, prices rose 0.2% in July, down from 0.3% the previous month, while core prices ticked up 0.3%, a bit faster than the 0.2% in June.
Many economists expect the impact of tariffs will continue to push inflation higher in the coming months, even as the impact of the duties has so far not been as large as many feared.
Brian Bethune, an economist at Boston College, said that overall U.S. tariffs — calculated as the amount of duties paid by U.S. companies divided by overall imports — has reached 10%, the highest in decades, and will likely keep rising for months.
“Those cost increases will be passed on to the consumer in some way, shape, or form,” Bethune said. Some companies could return to “shrinkflation,” he noted, in which they reduce the package size of a good while keeping the price the same.
And companies that are absorbing tariff costs, which reduces their profit margins, are less likely to hire new employees, he said. Job gains have slowed to a crawl since April.
Gas prices fell 2.2% from June to July and have plunged 9.5% from a year earlier, the government’s report said. Grocery prices slipped 0.1% last month, though they are still 2.2% higher than a year ago. Restaurant meals continued to get more expensive, however, rising 0.3% in July and 3.9% from a year earlier.
Tariffs appeared to raise the cost of some imported items: Shoe prices jumped 1.4% from June to July, though they are still just 0.9% more expensive than a year ago. The cost of furniture leapt 0.9% in July and is 3.2% higher than a year earlier. Clothing prices ticked up 0.1% in July, after a larger rise in June, though they are still slightly cheaper than a year ago.
Tuesday’s data arrives at a highly-charged moment for the Labor Department’s Bureau of Labor Statistics, which collects and publishes the inflation data. Trump fired Erika McEntarfer, then the head of BLS, after the Aug. 1 jobs report also showed sharply lower hiring for May and June than had previously been reported.
The president posted on social media Monday that he has picked E.J. Antoni, an economist at the conservative Heritage Foundation and a frequent critic of the jobs report, to replace McEntarfer.
Adding to the BLS’s turmoil is a government-wide hiring freeze that has forced it to cut back on the amount of data it collects for each inflation report, the agency has said. UBS economist Alan Detmeister estimates that BLS is now collecting about 18% fewer price quotes for the inflation report than it did a few months ago. He thinks the report will produce more volatile results, though averaged out over time, still reliable.
Trump has insisted that overseas manufacturers will pay the tariffs by reducing their prices to offset the duties. Yet the pre-tariff prices of imports haven’t fallen much since the levies were put in place.
Economists at Goldman Sachs estimate that foreign manufacturers have absorbed just 14% of the duties through June, while 22% has been paid by consumers and 64% by U.S. companies. Based on previous patterns, however — such as Trump’s 2018 duties on washing machines — the economists expect that by this fall consumers will bear 67% of the burden, while foreign exporters pay 25% and U.S. companies handle just 8%.
Many large U.S. companies are raising prices in response to the tariffs, including apparel makers Ralph Lauren and Under Armour, and eyewear company Warby Parker.
Consumer products giant Procter & Gamble, maker of Crest toothpaste, Tide detergent and Charmin toilet paper, said late last month that it would lift prices on about a quarter of its products by mid-single-digit percentages.
And cosmetics maker e.l.f. Beauty, which makes a majority of its products in China, said on Wednesday that it had raised prices by a dollar on its entire product assortment as of Aug. 1 because of tariff costs, the third price hike in its 21-year history.
“We tend to lead and then we will see how many more kind of follow us,” CEO Tarang Amin said on an earnings call Wednesday.
Matt Pavich, senior director of strategy and innovation at Revionics, a company that provides AI tools to large retailers to help them evaluate pricing decisions, says many companies are raising prices selectively to offset tariffs, rather than across the board.
“Up until now we haven’t seen a massive hit to consumers in retail prices,” Pavich said. “Now, they are going up, we’ve seen that.”
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Associated Press Retail Writer Anne D’Innocenzio in New York contributed to this report.
