The news: A key inflation gauge that excludes food and energy prices picked up in July, suggesting tariff-related cost increases are being passed along to consumers.

• Core CPI, which strips out energy and food, rose 3.1% YoY, up from 2.9% in June.
• On a monthly basis, that closely watched measure rose 0.3%, the highest increase since January and up from June’s 0.2% advance.

The headline consumer price index increased 0.2% MoM, down from June’s 0.3% gain, the Labor Department reported on Tuesday. The annual rate of inflation was 2.7%, matching June. That was below economists’ expectation of a 2.8% rise, per Reuters.

Price pressures: Though gasoline prices fell 2.2% MoM and food prices were flat overall, consumers still grappled with cost increases elsewhere.

• Shelter costs rose 0.2% MoM, and traveling consumers faced higher airline fares, which rose 4% over the month.
• Categories with exposure to tariffs showed increases. Apparel prices edged up 0.1% MoM overall, but footwear prices spiked 1.4% MoM. Furniture and bedding prices were up 0.9% MoM.

Our take: Though price increases so far have been modest, the acceleration in core prices in July shows that tariffs are having an effect. The Trump administration’s upending of decades of tariff norms signals that high tariffs are here to stay for at least the next few years.

Tariffs will take a greater toll on consumers who have already cut back on nonessentials and are hunting for discounts. Nearly half (47%) of CFOs worldwide indicated in March that they planned to pass along 71% or more of their share of tariff costs to consumers.

Retailers and producers are exhausting their early strategies to shield consumers. Against this backdrop, they will need to plan for sustained cost pressures. Other strategies retailers can take on include negotiating with suppliers on cost-cutting measures or the use of lower-cost materials, exploring investments in onshoring production to avoid tariffs, and increasing D2C sales to improve profit margins.

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