Inflation heats up as tariffs bite into goods
Tariffs are now showing up on your receipt. The June 2025 CPI rose 0.3% from May—more than triple the prior month’s pace—and pushed annual inflation to 2.7%, the hottest since February. It’s not a blowout, but it is a clear turn after a spring lull.
The pressure is coming from two places: the grocery aisle and the goods shelves. Food prices climbed 0.3% both at home and away from home. Coffee kept surging, now up more than 13% from a year ago after supply strains earlier in the year. Eggs, while down in June, are still more than 20% pricier than a year ago—sticky after last year’s disease-related disruptions and ongoing tight supply.
On the goods side, early tariff pass-throughs are starting to land. Analyses from the Yale Budget Lab estimate that 61% to 80% of new 2025 tariffs were passed through to consumer core goods prices in June. The average effective tariff rate hit roughly 10% last month, up from 2.4% at the start of the year. That “effective” number is lower than the headline statutory rates because not every import is hit, firms hedge, and some absorb costs—at least at first.
Where is it showing up? Home-related categories like window and floor coverings, major appliances, and electronics posted noticeable gains. Core goods prices are now running about 1.9% above their pre-2025 trend. But the impact is uneven: apparel remains at or below trend, suggesting retailers are discounting to move inventory or relying on alternative sourcing to blunt the hit.
There were offsets. Energy prices fell about 1% on the month as gasoline and natural gas slipped, cooling the headline number. Vehicles helped too: new car prices fell 0.3% and used vehicles dropped 0.5%. Improved inventory and cautious buyers are keeping auto price pressures in check, even as insurance remains a longer-term headache for many households.
Restaurants were a mixed bag—and a window into the consumer divide. Full-service restaurants, employee sites, and schools saw firmer increases, pointing to higher operating costs and wage pressures that are still working their way through. Limited-service spots (think fast-casual and quick-service) posted more muted gains, a sign that lower-income diners are trading down or pulling back.
What it means for the Fed, retailers, and your wallet
For the Federal Reserve, June complicates the summer. Bond futures now imply only about a 7% chance of an immediate rate cut, with odds closer to 60% for September and roughly a one-in-three chance of staying on hold then. Several economists say monthly readings nearer to 0.20% would be the comfort zone that could unlock a more dovish stance. We’re not there yet.
Bank of America’s team expects core goods to drive much of the acceleration in the near term, citing broad-based price hikes tied in part to tariffs. Ameriprise’s Russell Price thinks the tariff bite will peak in the fourth quarter before easing through 2026 as supply chains adjust and firms rebuild buffers. That timeline matters: the longer goods inflation stays warm, the more it risks bleeding into services, where price changes tend to stick.
Why are tariffs coming through unevenly? It’s the tug-of-war between margin and market share. Some importers and retailers eat the costs for a while to avoid losing customers; others pass them on quickly because they lack pricing power elsewhere. Inventory cycles make a difference, too. Categories stocked before tariffs hit can delay price changes, while just-in-time segments move faster. Competitive dynamics matter: apparel faces fierce discounting, while big-ticket home goods and electronics have less room to hide increases when component costs climb.
Effective versus statutory tariffs is another key piece. Statutory rates are what’s printed on paper. Effective rates reflect what actually lands in the CPI after exemptions, re-routing of supply chains, and corporate strategies like currency hedges or long-term contracts. That’s why the average effective rate (about 10% in June) can sit below the headline numbers yet still push prices meaningfully higher compared with earlier this year.
Food tells its own story. Coffee’s double-digit jump year over year hints at global supply issues earlier in the year bumping into firm demand. Egg prices, while off their peak, remain high compared with last year because it takes time to rebuild flocks and normalize supply. Restaurants layer on other costs—wages, rent, insurance—so even small wholesale increases can translate into noticeable menu changes.
The consumer is adapting in small, practical ways. Households are trading to store brands, using loyalty discounts, and spreading out purchases of durable goods. Big retailers are testing shorter, targeted promotions rather than blanket markdowns. In electronics and appliances, expect more “bundle and save” offers and financing deals as sellers try to soften the sticker shock without cutting list prices outright.
The holiday season looms large. The Conference Board projects tariffs could lift inflation into the peak shopping period and then weigh on growth late this year and into early 2026. If retailers front-load increases to protect margins before Black Friday, we could see a quick run-up in goods prices followed by aggressive promotions to clear shelves. That kind of whiplash is exactly what frustrates shoppers and complicates the Fed’s read of the trend.
For manufacturers and wholesalers, the calculus is shifting too. Some domestic producers are taking advantage of tariff “umbrella” pricing to nudge tags higher, even if their own input costs haven’t jumped as much. Others are hedging currency and renegotiating contracts to lock in costs. A number of importers are diversifying sourcing—moving production from higher-tariff origins to lower-tariff alternatives—but those pivots take quarters, not weeks.
There’s an upside risk and a downside risk. Upside risk: a second wave of pass-through in late summer as older inventory turns over, lifting core goods again. Downside risk: energy stays soft, vehicle prices keep easing, and aggressive promotions cap the goods impulse just as services disinflation resumes. Either path keeps the Fed cautious.
Here’s what to watch next:
- Core goods in July and August CPI: do electronics, appliances, and home goods keep leading gains?
- Import and producer price indexes: early reads on whether pipeline costs are still climbing.
- Retail earnings calls: any guidance on planned holiday pricing and inventory levels.
- Freight and shipping rates: a proxy for whether supply-chain tightness is building into year-end.
- Restaurant foot traffic: are diners trading down further or stabilizing?
- Market odds for September: do monthly CPI prints drift closer to 0.2%?
June didn’t blow the doors off, but it did mark a turn: tariffs moved from policy debate to price tags. If pass-through intensifies into the fall, inflation could look stickier just as the Fed is weighing its first trim. If offsets—energy, vehicles, and discounting—keep doing work, this may be a bump rather than a new baseline. The next two reports will tell us which story wins.
