July CPI: Inflation still above target, politicized clouds on the horizon

Today’s CPI report is not apocalyptic, but still concerning. This is in line with expectations. The CPI rose 0.2 percent during July, and 2.7 percent over the last year, above the Federal Reserve’s 2 percent annual target.

It would be even higher if not for falling energy prices, which are decreasing for reasons having nothing to do with tariffs or monetary policy.

Since supply and demand fluctuations can mask what’s happening with proper monetary inflation, economists pay closer attention to Core CPI, which removes volatile food and energy prices. This rose 0.3 percent during July, and 3.1 percent over the last year.

July’s reading once again does not incorporate President Trump’s Liberation Day tariffs, most of which took effect on August 7. Those should begin to show up in the August and September readings, depending on how people react to them.

With China tariffs now delayed until November 9, those price increases are off the table for August but could begin to show up in November and December’s CPI readings.

Some businesses and individuals will stockpile goods ahead of tariffs. Others will hold off on purchases, look for less expensive substitutes, or wait for courts to strike down many tariffs as unconstitutional. While these adaptations will help to blunt price increases, tariffs will still raise prices of affected goods as they come into effect.

Different goods’ prices will also rise at different rates. While overall clothing prices increased slower than inflation at 0.1 percent, items coming from newly-tariffed countries such as Vietnam increased rapidly. Infant and toddler clothing prices increased 3.3 percent in July alone, since their short inventory cycles mean price increases pass through faster.

New car prices stayed flat in July, though substantial increases could be on the way as Liberation Day tariffs phase in and move through supply chains. Used car prices are up 4.8 percent on the year, as more families turn to buying used cars, which have a limited supply.

Each tariff will cause a one-time jump in CPI when it phases in, rather than the sustained increase that comes from continuous deficit spending or too-loose monetary policy.

Since inflation staying above target does not support Trump’s tariff agenda, look for him to attack its credibility. DOGE-related staffing cuts at the Bureau of Labor Statistics (BLS) gave Trump just such an opening. So does his decision to fire BLS Commissioner Erika McEntarfer after a lackluster jobs report.

While there is no evidence that Trump’s BLS staffing cuts are intended to reduce BLS’s credibility, it would be in character for him. Either way, he is taking full advantage.

Those cuts have forced BLS to rely more on statistical imputation rather than actual measurement. This basically means relying on past correlations and other guesswork. As much as 35 percent of July’s CPI was imputed rather than measured, up from 10 percent when Trump took office in January. Relying more on imputation not only risks inaccuracy, it also makes data more vulnerable to manipulation.

This may play a role in Trump’s choice to replace McEntarfer with The Heritage Foundation’s EJ Antoni. Heritage’s president views its mission as “institutionalizing Trumpism.”

This staffing choice will not help BLS’s credibility. But it may result in reports that are more friendly to the administration, especially after staffing cuts increase the agency’s reliance on imputation and other guesswork.

BLS’s recent politicization may also affect the Federal Reserve, which is also a target of presidential ire for refusing to lower interest rates while inflation remains high. The trifecta of slow growth, above-target inflation, and a vulnerable labor market mean that the Fed still might not cut interest rates at its next meeting in September.

After a member of the Fed’s Board of Governors recently resigned, Trump replaced her with loyalist Stephen Miran, who will bring Trump’s views to meetings. His vote is just one of 12 on interest rate decisions, but could be a sign of things to come.

If the president really wants the Fed to lower interest rates, he will need lower inflation first. Removing his tariffs while credibly committing to policy stability and spending restraint would give the Fed some room to lower rates.

Keeping with the credibility theme, it is essential that any interest rate decisions, whatever they are, come from the Federal Reserve and not the president.