A woman will be shopping at a supermarket in Arlington, Virginia on April 30, 2025.
SHA HANTING |Chinese News Service |Getty Images
From clothing to auto parts to electronics, tariffs make everyday items higher when the labour market is becoming increasingly vulnerable.
The major Labor Statistics Bureau’s inflation report released Thursday showed price increases for various tariff-sensitive items.
Apparel prices rose 0.5%, similar to video and audio products. Auto parts rose 0.6%, new cars rose 0.3%, and energy rose 0.7%. Grocery accelerated its largest monthly move since August 2022 by 0.6%. Furniture and bedding hits of 0.3%, up 4.7% from a year ago, while tools and hardware had a jump of 0.8%.
(Click here for information on complete inflation failures per item.)
More broadly, according to Fitch Ratings, products excluding food and energy increased by 0.3% that month, up 1.5% from a year ago. Coffee rose 3.6% that month, up 20.9% from a year ago.
Together, the increase may not sound dramatic. But they are at least enough to give both consumers and Federal Reserve policymakers a source of concern.
“We’ve already seen tariffs on our data for several months,” said Luke Tilly, chief economist at the Wilmington Trust. “Consumers weren’t really in a good place to handle the price hike that comes from tariffs.”
Consumers feel a hit
Furthermore, inflation numbers could be worse without consumers, if they are not wary of increasing prices from tariffs, spending, and especially reducing services, Tilly added. This means that companies have a lower pricing power, so the impact of tariffs is less severe.
Still, inflation, which is close to 3% in both the core and headlines, is quite apart from the Fed’s 2% target, potentially putting an economy dependent on consumer spending at risk as a major growth engine.
“The middle class squeeze from the tariffs is here,” said Heather Long, chief economist for the Navy Federal Credit Union. “It’s annoying to see a lot of basic essentials costing right now. Food, gas, clothing and shelters all had a big cost jump in August. This is just the beginning of a price hike. In the coming months, things will get worse as more costs are passed on to American consumers.”
President Donald Trump and the executives have argued that tariffs do not increase inflation.
Historically, that was the case.
Economists generally view tariffs as a driver of temporary prices, but have not contributed to long-term inflation. Yet, the sustainability of prices combined with the weakness of the labour market presents the challenge of the Fed male dog.
Policy Impact
Central bank officials will hold a meeting next week to vote on whether to lower the major overnight funding rate.
The market gathered on Thursday, according to CME Group’s FedWatch.
Overall, the market is priced at a 1/6 point reduction over the period, far surpassing the four Fed officials pinned in pencil during the last outlook released in June. This view is based on the idea that policymakers will look at price increases and focus on job weaknesses.
“We expect it to become clear that the Fed should reduce its reduction rate over the coming months,” Tilly said. “The slightly less pressure we get from tariffs on the goods side is actually outweighed by slowing the economy, slowing the labour market, slowing consumer spending.”
The Fed is pondering inflation, but it needs to weigh the weaknesses of the labour market.
Last week’s first unemployment claim reached its highest level since October 2021, but the main cause could be Texas’ unusual spikes and distortions from Labor Day holidays. However, recent data shows that the economy has effectively not added jobs this year. This is what drives the Fed to a lower rate.
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