The relationship between tariffs and inflation is top-of-mind for investors since it drives monetary policy, market expectations, and financial planning.
Here are some key points to consider:
- Recent inflation data shows prices rising 0.2% in July with annual inflation at 2.7%. This suggests that, while not definitive yet, some tariff costs may be beginning to flow through to consumer prices as companies adjust to higher import costs.
- The prices of goods have seen their 12-month inflation rate accelerate to 1.2%. For much of the period since the rate hikes of 2022, goods prices had experienced deflation. This is further evidence that some tariffs may be filtering through to prices. Meanwhile, the price increases for services have been decelerating.
- These price increases were largely driven by rising shelter costs (i.e., the cost of housing). For the headline index, this was offset by falling gasoline prices which have fallen 9.5% year-over-year.
- Companies are experiencing direct impacts from higher prices, with some reporting significant profit margin compression as they absorb higher costs, which may eventually lead to price adjustments for consumers.
- Inflation at these levels is stickier than policymakers would like. Core CPI rose 3.1% year-over-year in July, and one measure of "supercore" inflation - core CPI less shelter - rose 2.6%.
- The included chart shows the difference in inflation trends between goods and services. This is a key measure in determining whether trade policies are affecting inflation, consumers, and the broader economy.
While short-term policy changes can create market volatility and price pressures, maintaining a long-term investment perspective helps navigate these temporary disruptions and focus on the underlying fundamentals that drive economic growth over time.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.