U.S. Inflation Expected to Rise Amid Tariff Pressures

U.S. consumer inflation is projected to have increased in August 2023, driven by rising gasoline prices and the impact of tariffs on imported goods. This uptick is unlikely to prevent the Federal Reserve from implementing a widely anticipated interest rate cut during its upcoming policy meeting. The Consumer Price Index (CPI), which is scheduled for release by the Bureau of Labor Statistics on August 10, is expected to show an increase that could intensify concerns about stagflation following recent disappointing labour market reports.

Economists predict that consumer prices rose by 0.3 percent in August, following a 0.2 percent increase in July. Rising prices at gas stations and supermarkets are likely to have contributed significantly to this increase. Import tariffs, originally imposed under the administration of former President Donald Trump, have begun to influence prices more directly, particularly in categories such as coffee and beef, which have seen substantial price hikes.

The gradual impact of tariffs has been noted in past reports, with analysts suggesting that businesses have largely sold through their pre-tariff inventories. Recent business surveys have indicated that price increases are imminent. Stephen Stanley, chief economist at Santander U.S. Capital Markets, stated, “The evidence is overwhelming that more tariff-related inflation is coming, though it may still be several months before it passes through fully.”

The CPI for the twelve months through July is projected to have advanced 2.9 percent, representing the largest annual gain in seven months. This follows a 2.7 percent increase in July. Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, noted that the slow response of consumer prices to tariff pressures has been partly due to distributors utilizing stockpiled goods imported before tariffs were enacted.

Excluding volatile food and energy prices, the core CPI is estimated to have risen by 0.3 percent for a second consecutive month. Economists expect that tariff-related price increases for various goods, including apparel and furniture, will contribute to the core CPI. Additionally, stronger prices for services are anticipated as travel demand drives up costs for airline tickets and accommodation.

Looking ahead, core CPI inflation is expected to match July’s increase of 3.1 percent over the twelve months through August. The Federal Reserve monitors the Personal Consumption Expenditures (PCE) price index, targeting a 2 percent inflation rate. The core PCE inflation for August is projected to reflect an increase of 0.3 percent, maintaining the annual rise at 3.1 percent, up from 2.9 percent in July.

The Federal Reserve is widely expected to reduce interest rates by a quarter percentage point at its policy meeting next Wednesday. This follows a pause in its easing cycle earlier this year, primarily due to uncertainties regarding the inflationary impact of tariffs. A lower-than-expected CPI could indicate softening demand, which may hinder businesses’ ability to pass on tariff-related costs to consumers.

Veronica Clark, an economist at Citigroup, remarked, “The next few months of data will provide a useful test of tariff-related price increases, as the fall can be a natural time for businesses to raise prices.” She added that while stronger price increases are anticipated, muted goods prices could be indicative of weak consumer demand limiting businesses’ pricing power. This backdrop of weak demand has led to expectations of continued rate cuts from the Federal Reserve in the near future.