Tariffs finally show up in prices

June's consumer price index settled the argument over whether tariffs raise prices. Goods that carry tariffs got noticeably dearer. Energy swings kept the headline figure in check, but imported home furnishings and durable household goods rose by 1.0 per cent on the month, which is what it looks like when border levies reach the shelf.

Why it took until June

For three months after the April tariff announcements, the price data looked almost serene, and the administration took that as proof that foreign suppliers were paying. There was a simpler explanation. Importers had front-loaded purchases in the first quarter, so heavily that the surge in imports pushed measured GDP into contraction, and shops spent the spring selling stock that had cleared customs before the new duties applied. Retailers also held back price rises while they waited to see whether the April rates would survive negotiations. By June the old stock was running down and the rates had not gone away.

Where the duties showed up

The sub-indices show pass-through of the kind found in textbooks. Categories that depend heavily on imports and have few domestic alternatives, such as appliances, electronic components and footwear, all rose sharply and at the same time. The lag created by stockpiling in the first quarter has gone. Retailers are now passing the duties they have paid straight into their prices.

The method for reading this is straightforward. Rank the index components by their import content and compare their monthly changes with those of domestically produced goods and of services. If tariffs were being absorbed by foreign exporters or by retail margins, the import-heavy categories would look much like the rest. In June they did not: the goods with the highest import shares rose fastest, while services such as rent and medical care continued the gradual cooling they have shown all year. A pattern that clean is hard to put down to chance.

Headline calm, goods heat

The headline index hid much of this. Headline inflation rose to 2.7 per cent over the year and core inflation to 2.9 per cent, neither of them alarming in isolation. Falling energy prices and slowing shelter costs offset much of the jump in goods. That offset will not last forever: shelter inflation cannot keep falling at the same pace, and energy moves both ways. The goods component, which carries the tariff effect, is the part of the index that is turning.

There is a precedent worth noting. When America imposed tariffs on washing machines in 2018, retail prices of washers rose within months, and so did prices of dryers, which were not tariffed but are usually sold as a pair. Retailers used the cover of the duty to reprice a whole category. The June data suggest the same behaviour across a much wider range of goods, because this time the tariffs cover most imports rather than one product line.

Rate cuts look further off

That is bad news for the Federal Reserve, which had been counting on inflation continuing to fade. Core goods prices are rising again after two years of steady declines, and the central bank will find it much harder to deliver the rate cuts it had planned.

The Fed has held its policy rate at 4.25 to 4.5 per cent since December and meets again at the end of July. It is under open pressure from the White House to cut, and at least one governor, Christopher Waller, has argued publicly for a cut this month on the grounds that tariff effects will be temporary. The June report makes that argument harder to win on the committee. Officials who worried that tariffs would not stay a one-off now have evidence that pass-through is real and fairly quick.

Winners and losers

Domestic producers of furniture and appliances gain some pricing power, since their imported rivals are now dearer, and large retailers with the scale to spread costs across thousands of products can protect margins better than smaller chains. The losers are households on lower incomes, who spend a bigger share of their budgets on exactly the goods now rising fastest. Borrowers are exposed too: every month that inflation stays above target is a month in which mortgage, credit-card and small-business rates stay well above the levels borrowers grew used to in the 2010s. Credit-card balances, which reprice quickly, feel it first.

The case for looking through it

The best counterargument is that a tariff raises the price level once rather than the inflation rate for ever. If rates stay where they are, the monthly jumps should fade within a year, and a central bank that tightens against a one-off shift risks slowing the economy for nothing. The labour market has been cooling, and wage growth is not running hot enough to turn higher goods prices into a spiral. There is real force in that view, and it explains why the Fed has not raised rates in response.

Its weakness is that the tariffs are not a single event. They have been imposed, suspended, raised and threatened in waves since February, and more letters went out this month. Each wave produces another round of repricing. A central bank cannot look through a shock that keeps recurring, particularly after four years of above-target inflation have made households quicker to expect higher prices.

The data to watch are the July and August consumer price reports, the core goods component within them, and the Fed's preferred measure, the personal consumption expenditures index. A second month of sharp rises in import-heavy categories would confirm the June pattern. A reversal would suggest that retailers front-ran the duties and will now compete prices back down. Surveys of households' inflation expectations matter too, because they show whether the public is starting to treat the price rises as permanent.

The June figures show that consumers, not companies, are now paying the tariffs, and with core goods inflation back the Fed will probably have to push its planned cuts further into the future. A July cut now looks very unlikely, and even a move in September will need two more benign inflation reports to justify it.