Recent economic data suggests the central bank remains on track to cut interest rates at its next meeting in September. The Fed's selected inflation indicator held steady in July, suggesting the central bank remains on track to begin lowering interest rates as soon as its next meeting in September.

Consumer prices rose 0.2 percent in July and were up 2.6 percent from a year earlier, according to the Personal Consumption Expenditures price index released by the Commerce Department on Friday. The annual pace was the same as the previous period.

Core prices, which exclude volatile food and energy costs and are considered a more reliable measure of underlying inflation, rose 0.3 percent from the previous month. Compared with the same period last year, they rose 2.9 percent, slightly higher than the annual increase in June.

Are Price Pressures at an Inflection Point?

President Trump's tariffs have begun to push up consumer prices, but what remains unclear is how far those increases will go and whether they will lead to a temporary spike in inflation or something more persistent.

The impact has been most pronounced on products heavily exposed to tariffs, such as furniture, appliances, and other household goods, as well as recreational goods and footwear. There are some signs that prices across the service sector are also starting to strengthen, but this could be temporary.

Many companies were able to withstand price increases for customers because they had built up large inventories before the tariffs took effect. However, when those inventories dwindle, CEOs face the difficult decision of whether to absorb the higher costs or pass them on to their customers.

Are Consumers Still Spending?

How persistent tariff-related inflation ultimately is depends largely on consumers' willingness to continue spending despite rising prices. One prevailing theory is that companies that choose to charge their customers higher prices may experience a sharper decline in demand as Americans are forced to be more selective about what they buy and when. This could not only limit the extent to which prices for goods and services rise across the country but also ultimately help control inflation.

In July, spending rose 0.5 percent, suggesting that the decline has not yet become significant. If companies whose profit margins have been squeezed by tariffs begin laying off workers, discretionary spending will likely take an immediate hit.

Although monthly job growth has slowed sharply this summer, the unemployment rate has remained relatively stable at around 4.2 percent. This slowdown could reflect reduced demand for new hires, but it could also reflect the fact that Trump's immigration restrictions have led to a sharp reduction in the labor force. (alg)

Source: New York Times