8/15/25 REcap: Tariff Effects Start to Hit Inflation Data

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Inflation Woes

Inflation, the thorn in everyone's side since 2022, is getting more complicated. We've now been living with some level of Trump imposed tariffs since February 4th and the prices are starting to pass through, but they haven't really gotten to consumers....yet.

On Tuesday,  July's Consumer Price Index reading showed prices rising 2.7%, better than the 2.8% expected. Core inflation ticked up a firmer 3.1%, driven by shelter and services, but tariffs so far have shown only modest effects at the consumer level - and the market was THRILLED as traders took it as a green light for September rate cuts.

By Thursday, the story changed. Producer Price Index (the prices charged to wholesalers) surged nearly 7%, the largest annual gain since March 2022. Businesses are clearly passing along tariff costs to each other, even if they’re holding back on hitting consumers directly. Business can't absorb these higher prices forever, and eventually, in the coming months, they'll pass (or at least try to pass) these costs off on the customer.

The current theory is that a lot of tariff-driven inflation is stuck in the so-called "middle mile” — goods sitting in warehouses after companies rushed to import ahead of new duties. But as that inventory clears into the fall, economists expect price tags to rise quickly.

Goldman Sachs has reiterated its forecast that consumers will ultimately eat about two-thirds of the tariff burden by year’s end. Trump blasted the analysis, but its not hard to imagine, after all, why wouldn't business want customers to pay for as much as Trump's tariffs as possible?

The good news, for now, is that the massive 100% tariff's Trump tried to impose on China in April were delayed again ahead of last week's deadline - this time, for 90 days. 

Resilient Retail Sales

Retail sales climbed 0.5% in July, helped by strong auto demand and big promotions from Amazon and Walmart, marking a solid start to Q3 and showing consumers are still spending. But there may be trouble ahead, consumer sentiment slipped for the first time in four months, with year-ahead inflation expectations jumping to 4.9% from 4.5% in July. For the Fed, resilient spending paired with shaky confidence complicates the path for rate cuts. The data this week certainly showed that if the labor market wasn't weak, a rate cut in September would be unlikely.

Rate Cut Predictions 

The probability of a rate cut in September got a little worse after this week's data but it's still an overwhelming favorite. Analysts currently say there's an 85% chance of a cut on September 17th (down from 89% the week prior. 

We're seeing rates fall even despite rate cut noise. Trump is preparing to replace Jerome Powell as Fed Chair, and the choice could reshape mortgage rates for years. The pick is likely to be dovish and aligned with Trump’s push for faster rate cuts might send the 10-year Treasury yield — and mortgage rates — sharply lower, even before the new chair takes office.