July CPI Report Shows Firms Yet to Fully Pass Through Tariff Costs to Consumers, Experts Say

11:02 AM EDT, 08/13/2025 (MT Newswires) -- The latest consumer price index largely matched consensus expectations for July, showing that inflation is still stuck above the Federal Reserve's 2% target but businesses have yet to fully pass through tariff-related costs to consumers.

The seasonally adjusted CPI rose by 0.2% in July, meeting projections from a survey compiled by Bloomberg, and marking a slowdown from a 0.3% gain in June. Year over year, inflation was unchanged at 2.7%. The core CPI, which excludes volatile food and energy prices, also matched expectations, at 0.3% growth, lifting the year-over-year rate to 3.1% in July from 2.9% in June.

The July report provides critical insights into how tariffs are filtering through the economy, experts said.

"The effects of tariffs are still being observed and the impact was stable, but not increasing in July," Natixis Chief US Economist Christopher Hodge said in an email. "Businesses do look hesitant to fully pass along price pressures, so I'd expect a continued elevated inflation outlook for goods, but not a spike in any one month."

Analysts at BofA Securities seemed to share Hodge's sentiment on the nature of the tariff impact.

"After the June report gave us the clearest sign of tariff-driven price pressures to date, the July report showed more of a trickle through to consumer prices," the analysts said in an Aug. 12 note to clients. "To be sure, core goods prices have still been boosted by tariffs as prices are up 1.1 (year over year), but it doesn't seem that businesses are or have been able to fully pass on the cost yet. That may mean we see a more gradual period of price hikes or more margin compression."

American consumers have absorbed about 22% of tariff costs through June, but that figure will likely jump to 67% if tariffs follow the same course as that of prior rounds, Bloomberg reported, citing a Goldman Sachs report.

Markets have interpreted the latest inflation data as a win for the policy doves, pricing in a more than 90% probability of a September rate cut by the Fed, a level that is far too high, according to Hodge.

"The effects of tariffs are still murky and service prices now are on the rise," he said. "While the Fed is inclined towards protecting the labor market, inflation is still above target and looks to be rising."

While rate cuts are coming, given the Fed's advocacy for a strong labor market, the upcoming August jobs report will go a long way in deciding whether the central bank moves in September, Hodge said.

"A strong rebound in the employment report for August would make many policymakers hesitant to cut," he said, adding that it is "far from guaranteed the Fed will cut at that time."

At the start of this month, official data showed the US economy added fewer jobs than projected in July, while gains in the previous two months were revised down sharply.

The BofA analysts, meanwhile, said they need to wait for additional inflation data, namely, the producer prices index due out on Thursday, before making a call on the Fed's September meeting.

"We still see inflation as stuck above target," they said. "But with smaller-than-expected tariff passthrough and the upside surprises concentrated in components that don't read into (the personal consumption expenditures index), markets have interpreted (CPI) data as dovish. We prefer to wait for the PPI data to draw strong conclusions on July inflation."

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