July annual inflation figure hits 2.7%, lower than expected given tariff concerns

Why July’s inflation numbers may not be as bad as you think—despite tariff concerns

Modified on:
August 12, 2025 3:53 pm

The latest numbers from the Bureau of Labor Statistics (BLS) show that consumer prices rose 2.7% in July compared to last year. That is slightly less than the 2.8% economists had predicted. On a month-to-month basis, prices increased by 0.2%, matching expectations.

This is important because a lot of people were worried that recent tariffs would push prices up much faster. Instead, the impact so far has been more modest than feared.

Core inflation shows mixed signals

If you take out the more volatile food and energy prices—what economists call the “core” Consumer Price Index (CPI)—the numbers tell a slightly different story. Core CPI went up 0.3% for the month and 3.1% over the past year.

  • The monthly jump was the biggest since January.
  • The yearly rate was the highest since February.

Federal Reserve officials tend to watch core inflation closely because it can show longer-term trends. This rise means they still have to keep an eye on inflation pressures, even if the headline number looked better.

Which prices are going up and which are falling

Not all goods and services are moving in the same direction. Here is a quick breakdown from the July report:

  • Shelter costs rose 0.2% and were a big driver of overall inflation.
  • Food prices stayed flat for the month.
  • Energy prices dropped 1.1%.
  • New vehicle prices, which are sensitive to tariffs, were unchanged.
  • Used cars and trucks saw a 0.5% increase.
  • Transportation and medical care services each rose by 0.8%.

Some tariff-linked items like household furnishings and supplies rose 0.7% in July after a 1% increase in June. But apparel prices were up just 0.1%, and canned fruits and vegetables—also tariff-sensitive—were flat.

How tariffs are influencing prices

While tariffs are part of the inflation story, they are not creating the sharp spikes some feared. As former White House economist Jared Bernstein put it, “The tariffs are in the numbers, but they are certainly not jumping out hair on fire at this point.”

Economists are still debating whether tariffs will cause a one-time price bump or lead to more lasting inflation. For now, the data points more toward short-term impacts, but the broad range of items under tariff rules means the risk of longer-term effects is still there.

What this means for the Federal Reserve

The Federal Reserve has been under pressure to decide whether to cut interest rates again in September. This report gives them some breathing room. Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, said: “Inflation is on the rise, but it did not increase as much as some people feared… Longer term, we likely have not seen the end of rising prices as tariffs continue to work their way through the economy.”

For the Fed, the softer-than-expected inflation number may allow them to focus more on labor market weakness, which could keep a September rate cut “on the table.” Traders are betting strongly on that move and are also increasing their expectations for another cut in October.

The political backdrop

This inflation report also lands in the middle of a tense political climate for the BLS. President Donald Trump recently criticized the agency, accusing it of bias, and announced plans to nominate E.J. Antoni as the new commissioner. The BLS has faced budget cuts, staffing shortages, and has stopped collecting data in some cities, raising questions about the accuracy of its reports.

Wages and purchasing power

Even with slower inflation, workers are not feeling much relief. Inflation-adjusted average hourly earnings rose just 0.1% in July, putting the yearly gain at only 1.2%. That means paychecks are not stretching much further, even as overall price growth comes in lower than expected.

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Enobong Demas
Enobong Demashttps://polifinus.com/author/e-demas/
I write on social welfare programs and initiatives for the United States, focusing on how these programs impact the lives of everyday Americans. My background in environmental sciences allows me to approach these topics with a unique analytical lens to provide my readers with a clear and well-rounded insight, eliminating the complexities often common with these topics.

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