US inflation held steady in July despite import tariffs, bolstering bets that the Federal Reserve may cut interest rates next month.
Latest official figures showed that consumer prices rose 2.7% in the year to July, the same pace as in June, as lower energy costs offset price rises for items such as coffee, tomatoes and tools.
Analysts said the relatively contained pace of price rises could bolster the case for the US central bank to lower borrowing costs to support the economy as job growth slows.
But an underlying inflation measure – which is seen as a better indicator of economic trends – showed prices rising at the fastest pace since February.
So-called core inflation, which strips out food and energy costs, rose by 3.1% which is the fastest pace in six months, according to Tuesday’s data.
Seema Shah, chief global strategist at Principal Asset Management, said she still expected the Federal Reserve to lower borrowing costs in September to give the US economy a boost.
“There is some sign of tariff pass through to consumer prices but, at this stage, it is not significant enough to ring alarm bells,” she said.
However, she warned the decision could grow more complicated in the months ahead, as firms start to run out of goods that they had brought into the country before the tariffs went into effect.
The US Federal Reserve wants to see inflation at 2%.
With the pace above its target, the Fed has held interest rates this year despite pressure by President Donald Trump to cut borrowing costs, fearing that tariffs, which are taxes on imports, could cause prices to accelerate.
Trump has dismissed concerns that the measures will drive up prices or weigh on the economy.
He recently fired Erika McEntarfer, head of the Bureau of Labor Statistics after the agency – which also compiled the inflation figures – reported weaker-than expected jobs data which provoked alarm about the president’s tariff policy.
On Tuesday, he repeated his call for interest rates to fall and revived threats against Jerome Powell, the central bank’s chair.
The president threatened to “allow” a “major lawsuit” to go ahead against Mr Powell linked to a refurbishment of Federal Reserve properties.
“Jerome “Too Late” Powell must NOW lower the rate,” Trump wrote on social media.
The Fed was established by Congress and has powers to set policy independent of the White House.
Rising prices
Lindsay James, investment strategist at Quilter, said the latest inflation data was “messy” with “something to please all political persuasions”.
The report showed price jumps for the one month from June to July for typically imported items such as tomatoes, which rose 3.3%, and coffee, up 2.3%.
Over the same one-month period, prices for rugs and curtains climbed 1.2%, while tools and hardware rose 1.6%.
But many areas that pushed up inflation were in categories not directly affected by tariffs.
The price of air fares, for example, jumped 4% in the year to July while dental services rose 2.6%.
The price of clothing, one of the categories expected to be hardest hit from the new measures, rose just 0.1% over the month, cooling from June.
“In the short-term, markets will likely embrace these numbers because they should allow the Fed to focus on labor-market weakness and keep a September rate cut on the table,” said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management.
“Longer-term, we likely haven’t seen the end of rising prices as tariffs continue to work their way through the economy,” she added.
The average tariff rate in the US has surged this year, with a minimum tax of 10% in place for most goods since April and certain items, such as cars, hit with higher duties.
Since the latest measures went into effect this month, most goods entering the US are facing taxes of between 10% and 50%, depending on their origin.
Trump has, however, exempted key items including most imports from Canada and Mexico as well as other categories such as oil and smartphones.
