July CPI Report Forecasts Show Continued Tariff-Driven Inflation

Key Takeaways

• The Consumer Price Index report will likely show inflation picking up in July.
• Economists say tariffs are fueling the rise in consumer inflation.
• While services inflation has been falling, an uptick could mean inflation will prove stickier.

Tariff-induced price rises are expected to continue to weigh heavily on the economy, pushing inflation higher yet again, according to forecasts for the July Consumer Price Index report.

Economists expect the CPI to rise 0.2% in July on a monthly basis and 2.8% year over year, according to the latest consensus estimates from FactSet. Core CPI, which excludes more volatile food and fuel prices, is expected to come in at 0.3% on a monthly basis and 3% year over year. “[It’s] definitely a hotter report,” says Priya Misra, portfolio manager for the $7.3 billion JPMorgan Core Plus Bond ETF JCPB.

July CPI Report Highlights

• CPI report release date and time: Tuesday, Aug. 12 at 8:30 a.m. Eastern
• The CPI is forecast to rise 0.2% in July after rising 0.3% in June.
• Core CPI is forecast to rise 0.3% in July after rising 0.2% in June.
• The CPI year over year is forecast to rise 2.8% in July after rising 2.7% in June.
• Core CPI year over year is forecast to rise 3.0% in July after rising 2.9% in June.

Services Sector and Auto Prices in Focus

At Goldman Sachs, economists predict a 0.27% increase in the overall CPI and a 0.33% rise in core CPI. On a year-over-year basis, that would equate to a 3.08% rise in core CPI.

Goldman Sachs economists predict that while new auto prices will continue to decline, falling 0.20%, used car prices will rise by 0.75%, overall adding 0.02 points to July’s core CPI inflation. They believe areas hit particularly hard by tariffs, such as household furnishings and recreational goods, will add a total of 0.12 points of core CPI increase on top of the bump from cars, they say. In addition, another area of focus for the July report is airline fares, which they expect to rise by 2% for the month.

While goods price inflation has been rising, JPMorgan’s Misra says services sector inflation has been slowing. She’d expect such a pattern if tariffs were causing a one-time rise in inflation. If services inflation starts rising, however, this could be a sign that inflation is a stickier problem. “It will hurt both bonds and stocks if you get a high CPI number that’s not just driven by goods. It’s harder for the Fed to make the case to cut rates,” she explains.

Full Tariff Impact Still Yet to Be Felt

Misra says the full weight of tariffs has yet to hit US consumers. She estimates that the overall US tariff rate on goods is currently about 15%, while customs revenue shows recent imports have only had an effective tariff rate of 9%-10%.

When firms are eventually forced to restock inventory, Misra says the eventual effect on inflation could cause CPI increases to hit 3.0%-3.5% by December on a year-over-year basis, and for core CPI growth to hit 3.5%-4.0%.

Goldman economists see a somewhat milder 2.9% year-over-year December CPI increase and a 3.3% rise for core CPI. “Over the next few months, we expect tariffs to continue to boost monthly inflation and forecast monthly core CPI inflation between 0.3-0.4%,” they write. “Our forecast reflects sharp increases in most core goods categories, where tariff-related increases in prices will be most acute in consumer electronics, autos, and apparel categories due to their reliance on imports, but limited impact on core services inflation, at least in the near term.”

When Will the Fed Cut Rates?

Futures markets are pricing in a 95% chance of a quarter-point interest rate cut from the Federal Reserve in September, according to the CME FedWatch tool, with a 62% chance of a further quarter-point cut in October.

Misra agrees with the consensus estimate, saying that as long as inflation stays limited to goods, “The Fed can look through it, and they can cut in September.”