The June CPI showed clear evidence of the impact of the Trump tariffs, with many of the items subject to tariffs seeing higher rates of inflation. We will likely see more evidence of the tariffs’ impact in the July data, as more companies begin to pass on the tariffs in the form of price increases.

In June, the overall CPI rose by 0.3 percent, while the core index rose just 0.2 percent. For the year, they are up 2.7 percent and 2.9 percent, respectively. The higher increase in the overall CPI was driven by a 0.3 percent rise in food prices for the month and a 0.9 percent rise in energy prices.

Food Prices Showing Effects of Tariffs and Deportations

We are likely to again see rapid inflation in food prices in July, as some tariffs on food items will be kicking in and we may also begin to see the effect of fewer farm workers due to the Trump administration’s immigration crackdown. The food at home component rose 0.3 percent in June.

A 7.4 percent one-month drop in egg prices was a big factor limiting food inflation in June. That sort of sharp decline is unlikely to re-occur. As a result, food prices will rise between 0.3-0.4 percent in the month, which is somewhat faster than their 2.4 percent rate over the last year.

Restaurant prices rose 0.4 percent in June and were up 3.8 percent over the last year. Restaurants are seeing higher costs from food prices, but wage growth for restaurant workers has slowed. Also, demand has been pretty much stagnant over the last six months. We will probably see restaurant prices increase 0.3-0.4 percent in June.

Electricity Price Increases May Lead to a Rise in Energy Prices

Gas prices rose 1.0 percent in June, after falling the prior two months. This rise is likely to be largely reversed in the July data. However, electricity prices are likely to continue on their upward path. Electricity prices rose 1.0 percent in June and are up 5.4 percent over the last year. With demand for electricity surging due to the growth of data centers, and supply restricted due to efforts to block clean energy sources, we are likely to see rapid growth in electricity prices at least through the rest of the year.

 Rental Inflation Slows Further

The rent proper index came in at 0.2 percent in June, while the owners’ equivalent rent index rose 0.3 percent. They are up 3.8 percent and 4.2 percent over the last year, respectively. Inflation will round to the same numbers in the July data. The indexes will continue to show lower inflation through the rest of the year and likely into 2026, as inflation in the CPI indexes falls in line with the inflation in units coming on the market.

Hotel Prices Will Rise in July

The price index for housing away from home fell 2.9 percent in June, knocking 0.04 percentage points off inflation for the month. Hotels are seeing weak demand, but prices are now down 2.5 percent over the last year. The June drop was an aberration (large rises or falls are common in this measure) and will likely be partially reversed in the July data.

Car Prices Will Rise In July

The new and used vehicle indexes have been defying gravity with both falling in June, declining by 0.3 percent and 0.7 percent, respectively. It was the second consecutive decline for the new vehicle index and the fourth consecutive decline for the used vehicle index. For the last year, the new vehicle index is up just 0.2 percent, while the used vehicle index is up 2.8 percent.

Weak demand is putting downward pressure on prices, but domestic manufacturers are seeing higher input prices for items like steel and aluminum due to tariffs, while imported cars are being directly hit with tariffs of 25 percent in most cases. The tariffs will likely begin to be visible in the July data, with further price hikes the rest of the year.

Other Tariffed Goods Will Also Have Higher Prices

The appliance index rose 1.9 percent in June. The index is now up 0.8 percent over the year. The apparel index rose 0.4 percent but is down 0.5 percent over the last year. The index for recreation products rose 0.8 percent in June but is still down 0.8 percent over the last year. All of these indexes will show further tariff driven increases in July

Air Fares Will Rise in July

Air fares have been an important factor holding down inflation in recent months as the index has declined 14.2 percent since January. This decline is unlikely to continue. Weak demand is putting downward pressure on prices here as well, but this rate of decline is not going to continue and is likely to be partially reversed in the second half of 2025.

Auto Insurance Index Will Show More Rapid Rise

After rising 11.3 percent in 2024 and 20.3 percent in 2023, the auto insurance index has been remarkably tame in recent months. It has risen just 0.9 percent since January, a 2.1 percent annual rate. The underlying factors driving insurance costs, most notably climate-related auto damage, are still present. The index rose just 0.1 percent in June. We will see an increase of at least 0.5 percent in July.

Inflation in Medical Services May Ease Slightly

The index for medical services, which accounts for 6.7 percent of the overall CPI and 8.4 percent of the core index, rose 0.6 percent in June, bringing its inflation rate over the last year to 3.4 percent. There is likely to be a somewhat smaller increase in July. The sector is being squeezed by cutbacks in government payments, but prices are not going to keep rising at the June pace.

Tariffs Will Be Clearly Visible in July

We first saw clear evidence of the impact of the tariffs in the June CPI. We will see more in the July data. The overall CPI will likely rise 0.3 percent, while the core rises 0.4 percent. This will bring the year-over-year rises to 2.9 percent and 3.1 percent, respectively. This is not likely a prelude to spiraling inflation, but it is clearly the wrong direction. With nominal wage growth slowing, it also means that real wage growth will have slowed to a crawl. Higher inflation, coupled with continued evidence of a weakening labor market will give the Fed a tough choice at its next meeting.