• The recently reported rise in U.S. inflation is elevated, but not alarmingly so — with tariff policy uncertainty surrounding it adding to the worry many economists feel.
  • How tariffs impact inflation depends on many influences, especially: (a) how much companies pass along to consumers and (b) how long it takes for companies to sell inventory purchased before tariffs.
  • Frequent changes in policy pronouncements makes determining their precise impact difficult — an obscurity that can be politically advantageous.
  • If Aug. 1 tariffs take effect, the price impact could be even greater than tariffs in place over the last several months.
  • Budget deficits and fed independence are also weighing on investors’ minds.

On July 15, the U.S. Bureau of Labor Statistics published its June measure for prices. Known as the Consumer Price Index, or CPI, this reading showed that the price of a representative basket of goods rose by 2.7% at a seasonally-adjusted annualized rate.

This was the highest month-over-month reading since January — a reading that is elevated, but not alarmingly so. It does not, for example, reach the heights of several post-COVID readings in the first half of 2022 where inflation hit 2.9% in March 2022 and 3.8% in June 2022.

However, this increase in prices is more worrisome than it might be in other circumstances because of the policy uncertainty that surrounds it. Households and economists are watching markets closely to understand how this policy uncertainty will impact household consumption, business profits and financial markets.

The administration’s on-again, off-again tariff policy and its effect on prices is predicted by most economists to at least push prices up in the short term. The details of that increase depend on at least two factors:

  • The extent of this increase depends on how much of the tariff will be passed along to consumers — a decision that individual companies will make differently.
  • The timing of this increase depends on how long it takes companies to sell through the inventory that they stockpiled prior to the implementation of tariffs.

These two uncertainties mean that the increase will differ across markets and will not happen in all markets at the same time.

Additionally, the potential for a ramp-up in inflation was lessened by the fact that most of the tariffs announced on April 2 were put on hold until July 9 — which ended a week ago. Consequently, over the past week, the administration has threatened increased tariffs on the EU, Mexico and an odd set of apparently politically motivated tariffs on Brazil.

Many of these tariffs, however, will not take effect until Aug. 1. Expect importers to stockpile until then as they did back in March and April, thus further complicating the task of calculating the impact of tariffs on prices.

Containers are piled up at a cargo terminal in Frankfurt, Germany, Wednesday, July 16, 2025. | Michael Probst Associated Press

This difficulty in estimating the impacts of these threatened and implemented tariffs can obscure the exact effect of these government moves on prices. But that doesn’t mean the effect isn’t there; it just makes it more difficult to attribute a shift in costs directly to tariff policy — a reality that could benefit the administration politically.

If the Aug. 1 tariffs do take effect, a possibility that the market has substantially discounted given the administration’s pattern of policy revision, the price impact could be even greater than the tariffs that have remained over the last several months from the last announcement. Mitigating this effect however, is the substitution away from goods from countries with high tariff rates to those with lower rates.

Tariffs, and the inflation that they cause, will create winners and losers in the U.S. economy. Expect firms that add less value domestically (think companies that sell low-cost manufactured goods or imported foods) to see reduced profits relative to those whose inputs are largely domestic (e.g. health care or other service industries).

What we will not see in the near term is a significant increase in domestic manufacturing. As much as the new administration is encouraging this, there are a number of economic reasons the uncertainty related to tariff policy does not warrant building new productive capacity in the U.S. This decline in the creation of new productive capacity is evidenced by The Federal Reserve Bank of Atlanta’s forecast for business fixed investment, which is at its lowest reading since the fourth quarter of 2021.

The outsized reaction from some press outlets and market commentators to the increase in inflation is most likely a result of the broader concern that forward thinking investors have about both tariffs and a bevy of other messaging and policy recommendations coming from the administration. Among these are the recently passed budget bill that increases budget deficits in the near term. Increases in deficit spending can be inflationary and while the July 4 signing of the bill was after the June numbers were recorded, and much too recent to have had an impact on current prices, there is significant concern that deficit spending could cause what would otherwise be transitory, temporary inflation effects from tariffs to linger.

Most worryingly for inflation, market watchers are concerned about the risk of a loss of central bank independence. President Trump’s repeated threats to fire Federal Open Market Committee Chairman Jerome Powell and replace him with someone who will lower interest rates to stimulate the economy sounds eerily familiar to both academic and professional economists.

The inflation risks associated with a loss of Federal Reserve independence are founded both in solid economic theory, empirical analysis done across the world, and in recent American experience. There is documentary evidence of the ways President Richard Nixon put pressure on then-Fed chair Arthur Burns to lower interest rates in the run-up to the election of 1972. This began a period of elevated inflation (reaching just over 12% annually in November 1974) that also coincided with a recession from the end of 1973 to the first quarter of 1975.

As with all macroeconomic events, there were many causes of both the inflation and the recession of this period, but the expansionary monetary policy of the Federal Reserve at the time was an important contributing factor. This example is one of many reasons market watchers and economists note with growing concern the interactions of President Trump surrounding the Fed.

Public reaction to the recent elevated CPI reading has been energetic and, in places, exaggerated. This reaction reflects a growing set of concerns about what could turn out to be a broad attack on the value of the dollar from different, overlapping threats: tariffs, budget deficits and central bank independence.

Together, these three policy and messaging stances have the potential to spur inflation to higher levels than even during COVID. But that level of inflation is not here yet.