Tariffs Begin Showing Impact on U.S. Inflation Data as Markets React to Rising Trade Tensions

Economic data is starting to reflect the inflationary pressure from tariffs as President Trump pushes for higher duties on European Union imports, sparking renewed concerns about the Federal Reserve’s interest rate trajectory and consumer spending patterns.

Market volatility increased in the second half of July after reports emerged that the Trump administration favors imposing tariffs of 15 to 20 percent on goods imported from the European Union, while maintaining 25 percent tariffs on foreign automobiles. 

Over the weekend, the Trump administration and the European Union announced a comprehensive trade framework that aims to avert a full-blown trade war. This deal establishes a 15 percent tariff on most EU goods imported into the U.S., a reduction from the 30 percent that had been threatened, though it is still significantly higher than pre-existing tariff rates. In return, the EU has committed to purchasing $750 billion worth of U.S. energy (over three years) and making an additional $600 billion in investments in the United States, along with significant military equipment purchases. While the agreement provides a general framework, many details regarding specific product exemptions (such as for aircraft, certain chemicals, and some agricultural products) and implementation still need to be finalized and approved by EU member states.

According to analysis from Northwestern Mutual’s chief investment officer, Brent Schutte, baseline tariffs implemented since early April are beginning to surface in inflation metrics, particularly affecting goods categories with heavy import dependence. “While headline data offered a mixed take on whether levies were being felt in the economy in a meaningful way, details of some reports highlighted areas that bear watching,” Schutte noted in the firm’s latest market commentary.

Goods Prices Show Clear Tariff Impact

The Consumer Price Index revealed that goods prices rose 0.2 percent in June, with import-heavy categories experiencing notable increases. Household furnishings and supplies jumped 1 percent, driven by major appliances rising 1.9 percent and furniture and bedding prices climbing 0.4 percent—a sharp reversal from the prior month’s 0.8 percent decline. Toy prices, another heavily imported category, increased 1.8 percent following May’s 1.3 percent rise.

Wholesale price data from the Producer Price Index showed similar patterns, with goods prices advancing 0.3 percent while services costs fell 0.1 percent. This shift is particularly significant because disinflation over the past two years has largely been driven by declining goods prices.

Consumer Sentiment Stabilizes Despite Ongoing Concerns

Consumer sentiment improved modestly in July, rising 1.1 points to 61.8—the highest level in five months. However, the reading remains 16.4 percent below December 2024 levels, reflecting ongoing uncertainty about trade policy impacts.

“Consumers are unlikely to regain their confidence in the economy unless they feel assured that inflation is unlikely to worsen, for example if trade policy stabilizes for the foreseeable future,” said Joanne Hsu, director of the University of Michigan’s Survey of Consumers in the report.

Year-ahead inflation expectations dropped to 4.4 percent from 5 percent, while five to 10-year expectations declined to 3.6 percent from 4 percent—both at their lowest levels since February but still elevated compared to late 2024.

Business Activity Shows Mixed Signals

The Federal Reserve’s latest Beige Book indicated slight economic acceleration, with five of 12 districts reporting modest gains while two showed slowing activity. However, businesses remain cautious about hiring decisions due to policy uncertainty.

All districts reported cost increases from tariffs, with manufacturing and construction sectors most affected. Many companies are passing along increased costs through price hikes or surcharges, though some face margin compression when customers resist higher prices.

Retail sales rebounded 0.6 percent in June after May’s 0.9 percent decline, suggesting consumers may be replenishing supplies after earlier stockpiling ahead of tariff implementation. The recovery broke a trend of slowing spending that began in April when reciprocal tariffs were announced.

Manufacturing and Housing Sectors Feel Pressure

Manufacturing output rose just 0.1 percent in June, with durable goods production declining 1.4 percent. Production of electrical equipment, appliances, and components—categories typically containing imported parts—fell 2.5 percent.

Homebuilder confidence remained weak at 33 in July, marking the 15th consecutive month in negative territory. Price cutting has increased, with 38 percent of builders reducing prices in July—the highest percentage since monthly tracking began in 2022.

Federal Reserve Policy Implications

The emerging inflationary pressure from tariffs could complicate Federal Reserve policy decisions later this year. If goods prices continue rising due to trade duties, it could slow or stall the disinflationary trend and prompt the Fed to delay anticipated rate cuts.

Labor market data shows continuing jobless claims at 1.956 million, with the four-week average reaching levels not seen since late November 2021, suggesting some softening in employment conditions that could factor into Fed deliberations.

Market participants are closely monitoring how tariff-driven inflation develops, as it could reshape the performance landscape across asset classes and influence the Fed’s policy path through the remainder of 2025.