Tariffs to Checkout Aisles: Inflation’s New Supply Chain

The U.S. core Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s preferred inflation gauge, is expected to show a 0.3% month-over-month increase in July, pushing the annual rate to 2.9%—up from 2.8% in June. This would represent the third consecutive month of year-over-year increases, marking the highest level since February. The data is set to be released on Friday, August 29, at 8:30 a.m. EDT. If confirmed, the core PCE inflation rate would remain above the Fed’s 2% target, highlighting ongoing inflationary pressures despite the gradual cooling seen since the summer of 2022 [1].

Economists have linked the continued inflationary uptrend to the Trump administration’s tariff policies, which have led to a steady rise in goods prices. The White House’s imposition of tariffs has resulted in price increases across a range of imported goods, with businesses passing these costs onto consumers as supply chains adjust. Bill Adams, chief economist at Comerica Bank, noted that inflation is now “flowing from the port to the warehouse to the checkout aisle.” The goods price component of the PCE is expected to rise at a monthly pace of 0.35-0.40 percentage points, a significant shift from previous months when these prices were often flat or negative [1].

Services inflation, which is typically more persistent, has also shown signs of upward momentum. Recent data from the Producer Price Index (PPI) indicated rising prices in the services sector, which are not directly affected by tariffs but could be influenced by spillover effects from higher goods prices. A continued uptrend in services inflation could pose a more significant challenge for the Fed, as these price increases tend to be more difficult to reverse. Sam Bullard of Wells Fargo emphasized the importance of monitoring services inflation, stating that a sustained increase could indicate that inflationary pressures are becoming more entrenched than previously anticipated [1].

Despite these inflationary signals, markets remain optimistic about a rate cut by the Fed in September. Following weak July payrolls data and shifting risk balances highlighted by Fed Chair Jerome Powell at Jackson Hole, the probability of a 25-basis-point rate cut at the September 16-17 meeting has risen to about 88%, according to bond futures markets. Powell’s comments suggested that the central bank is more concerned about the downside risks to employment than the current inflation outlook, which has softened the immediate impact of higher inflation expectations. However, some analysts remain cautious, noting that a sustained rise in core PCE inflation could limit the scope for further rate cuts in 2025 [1].

Consumer spending is also under the spotlight, with estimates suggesting a 0.5% increase in July, supported by strong new car sales. However, economists anticipate a cooling trend in the coming months as higher prices and a weaker labor market dampen consumer demand. Jennifer Lee of BMO Capital Markets observed that wage growth has been modest, which could reduce the purchasing power of households and constrain future spending. With trade tensions between the U.S. and China temporarily easing, consumer spending has not yet experienced a sharp decline, but continued inflationary pressures and weaker employment data could alter this trajectory [1].

Analysts remain divided on whether the current inflationary uptrend is a temporary effect of tariffs or a sign of a more persistent shift. Deutsche Bank’s Henry Allen pointed to the prices-paid component in the ISM services index, which has risen to levels historically associated with inflation rates above 4%. This suggests that future inflation could exceed current market expectations, particularly if more tariffs are imposed as part of the ongoing trade agenda. However, inflation swaps markets have yet to fully reflect these risks, raising concerns about potential mispricing and the possibility of a hawkish surprise from the Fed in the coming months [5].

Source: [1] July PCE Forecasts Show Inflation Above Fed's Target [2] What economists are watching for in tomorrow's PCE inflation and spending data [3] What economists are watching for in Friday's PCE inflation and spending data [4] Asia upbeat on Wall St boost as markets await US inflation data [5] Investors are ignoring the coming wave of tariff-driven inflation