Tariffs Are Quietly Fueling U.S. Inflation--And the Fed's Still on the Fence

U.S. core inflation came in softer than expected for the fifth straight month in Junebut don't let the headline fool you. While the 0.2% monthly rise helped cool nerves, signs of tariff-related pressure are starting to show under the surface. Goods exposed to Trump's latest trade actionslike toys, sports gear, and appliancesposted their fastest price increases in years. Inflation Insights' Omair Sharif noted that once you strip out cars, core goods prices actually jumped 0.55%, the biggest monthly pop since late 2021. Companies seem to be inching toward passing on more costs to consumers, possibly signaling the start of broader pricing power shifts.

For now, many firms are still holding the line. Some loaded up on inventory before tariffs hit. Others are eating the cost to protect margins. But that buffer may not last much longer. Trump has been escalating threatsnow targeting copper and floating new levies on Canada and Mexicowith an early August deadline that's unlikely to be pushed again. That could force a sharper shift in pricing behavior just as consumers are showing signs of fatigue. Retail sales later this week may reveal whether higher prices are starting to pinch demand.

Markets didn't flinch. The S&P 500 (SPY) briefly hit a new high, and yields ticked up. But the focus is shifting to the Fed's next big tell: the core PCE report due July 31. Bloomberg economists are bracing for a hotter print, pointing to lagged effects from the equity rally. Meanwhile, real wage growth is now running at just 1%its slowest pace in over a year. That combo of stubborn inflation and softening earnings power puts the Fed in a wait-and-see mode. No fireworks yetbut the fuse may be burning.