Tariffs imposed by Trump failed to significantly boost prices in July, as costs increased less than anticipated.
The U.S. economy is currently navigating a delicate moment, with the July 2025 inflation report indicating a modest increase in prices. The annual Consumer Price Index (CPI) has risen to about 2.7–2.8%, and core inflation (excluding food and energy) stands at around 3.0–3.1%.
This slight increase in inflation, particularly core inflation edging up, adds to concerns about persistent inflation but remains moderate relative to prior peaks. The Fed, keenly attuned to these figures, will be vigilant in its response to this uptick.
The current inflation trend poses a challenge for the Federal Reserve, particularly in the context of potential stagflation. Stagflation, characterized by stagnating economic growth combined with high inflation, is a potential threat that the Fed is closely monitoring. However, while inflation is not fully subdued, there is no strong evidence yet of stagflation risk intensifying significantly.
The Fed closely watches core inflation and inflation expectations. The slight increase in inflation and upward tick in one-year and five-year inflation expectations (3.1% and 2.9%, respectively) may concern the Fed about inflation persistence. However, headline CPI increased only moderately, and monthly gains were just below some forecasts. Given these nuances, the Fed may lean toward a cautious approach, potentially maintaining current interest rates or implementing smaller rate hikes, balancing inflation control without harming economic growth.
In recent months, tariffs have modestly contributed to the uptick in overall inflation, according to analysts. The average annualized growth of GDP over the first half of 2025 was 1.2%, well below the 2.8% growth in the same period last year. Consumer prices rose 2.7% in July compared to a year ago.
The inflation report is the first major data release from the U.S. Bureau of Labor Statistics (BLS) since President Donald Trump fired the agency's commissioner. Acting Commissioner, William Wiatrowski, is now leading the BLS.
The combination of elevated prices and sluggish hiring could lead to a potential economic double-whammy known as "stagflation". If the Fed raises interest rates to protect against tariff-induced inflation during a potential stagflation scenario, it risks stifling borrowing and slowing the economy further. Conversely, if the Fed lowers rates to stimulate the economy in the face of a potential slowdown, it threatens to boost spending and worsen inflation.
Amidst these concerns, the CME FedWatch Tool indicates that investors peg the chances of an interest rate cut at 86%. President Donald Trump, however, has expressed optimism about the economy, stating "The Economy is BOOMING under 'TRUMP'."
Despite the president's claims, the jobs report showed employers hiring at their slowest pace since 2020, and the reading snaps two consecutive months of increased inflation. The potential stagflation poses a significant challenge for the Federal Reserve, as it navigates the delicate balance between controlling inflation and sustaining economic growth.
- The current inflation trend, in the context of potential stagflation, raises concerns in both the business and finance sectors, as well as in politics, because the Fed needs to carefully balance inflation control without harming economic growth.
- The Fed's response to the increased inflation and the potential risk of stagflation is closely watched in the general news, as investors are betting on an 86% chance of an interest rate cut, while President Donald Trump remains optimistic about the economy.
