Inflation increased in June, tariff troubles likely cause: CEI analysis

Inflation rose 0.3 percent across all sectors in June, marking the beginning of Trump’s tariffs’ effect on prices. CEI senior economist Ryan Young says that the Federal Reserve’s efforts to combat rising prices and a shrinking economy will likely continue.

“It begins. Tariffs raise prices, and despite companies’ best efforts, they are showing up in consumer prices.

“The just-released June data are worrying but not disastrous, and July’s data will likely look similar. August could be brutal if President Trump’s biggest tariffs phase in on August 1. These include his Liberation Day tariffs announced in April, as well as 50 percent copper tariffs.

“Why did it take three months for tariffs to show up in the data? There are three main reasons.

“One is that companies and consumers both stockpiled imports before new tariffs took effect, to the point of setting a record high for imports in the first quarter of this year. Companies have been working through this inventory since then and are now starting to have to restock at higher tariff prices.

“A second reason is that President Trump keeps delaying his largest tariffs.

“A third reason is that a majority of US imports are not consumer goods. They are inputs that US manufacturers use, such as raw materials and machinery components. These price increases take time to work their way through supply chains down to consumer goods.

“Federal Reserve Chair Jerome Powell’s job remains difficult. Tariffs don’t just raise prices, they slow the economy. The economy actually shrank last quarter, and may even be in a recession right now.

“Usually the Fed would lower interest rates to provide some stimulus. But the tradeoff to stimulus is higher inflation, which is already too high, thanks to tariffs. Powell could raise interest rates to combat inflation, but at the tradeoff of further slowing down a shrinking economy. Look for the Fed to hold interest rates steady at its next meeting in two weeks.

“While tariffs are not strictly inflationary since they do not affect the money supply, they still raise prices. Trump’s tariffs are both high enough and broad enough to show up in CPI and PCE inflation indicators, and to affect Fed policy.

“President Trump could help solve rising prices and economic contraction by permanently removing his tariffs. Instead, look for him to continue blaming others and threatening the Fed’s independence.”