The Big Idea
Tariff-related price hikes show up in June
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The transmission of tariff hikes to consumer prices has been slow in coming, and the delay has created some complacency in markets. Many participants began to question whether we would see any acceleration at all on the back of higher tariffs after surprisingly benign April and May inflation figures. However, the June price numbers clearly showed the first installment of inflation coming from imported goods. A deep dive into those data suggests the PCE deflator may be more impacted than the CPI.
Imported goods categories
Admittedly, there is a certain amount of interpretation here, but I have singled out 21 items from the price aggregates that I believe include a significant amount of imported goods and are consequently likely to be affected by tariff hikes (Exhibit 1). If anything, an exhaustive list would likely be much longer. In any case, the highlights are motor vehicles and parts, apparel, and a variety of household goods. It is important to highlight each line item’s 2024 weight in the CPI and in the PCE deflator. For example, new cars represent 0.80% of the CPI and 0.25% of the PCE deflator.
Exhibit 1: Imported goods line items and weights in inflation aggregates
Source: BLS, BEA.
The first key insight from this exercise is that this subset of line items carries a larger weight in the PCE deflator than in the CPI. The sum of the 21 weights add up to 11.7% for the CPI and 13.4% for the PCE deflator. Moreover, if we excludes new cars and light trucks, which seem to be a special case, the corresponding weights are even more different, 7.3% for the CPI and 11.5% for the PCE deflator. This means that if the price changes for the line items are roughly equal between the two different inflation measures, the impact from tariffs on the PCE deflator will be larger than for the CPI.
June price changes
In fact, for most goods items, the CPI price changes in a given month translates directly to the PCE deflator (Exhibit 2). In a few cases, the readings are slightly different, mainly because the translation in some instances occurs at an even lower level of aggregation than I use. For example, I look at apparel as a whole, but the CPI price changes pass through to the PCE deflator at a more detailed level, such as men’s apparel, women’s apparel and so on.
Exhibit 2: June price changes for imported goods line items
Source: BLS, BEA.
June price changes should immediately refute the hypothesis that tariff hikes will have no impact on consumer prices. Ten of the 21 items posted price increases of more than 1% in June, including four that were up 2% or more. Note that these are mostly categories for which prices typically do not rise particularly fast. As Chair Powell has noted repeatedly, the bulk of inflation pressure in recent years has come from core services, not from goods. In fact, core goods prices in the CPI were on balance down slightly in 2023 and 2024.
The price changes should be particularly troubling given the flow of anecdotal information. Most firms have indicated that they have been holding the line on prices so far but are likely to attempt to pass through higher tariff costs going forward. Chair Powell referenced that exact dynamic in his post-FOMC press conference on Wednesday. June could prove to be just the tip of the iceberg, although that, of course, remains to be seen.
Motor vehicle prices bucked the trend in June, falling for both cars and light trucks. GM and Stellantis both reported in their second quarter earnings that they took a substantial profit hit in the quarter from tariffs, as they held off on raising sticker prices. Industry sources suggest that the automakers have decided to maintain pre-tariff pricing for most models through the end of the 2025 model year and to revisit their pricing strategies when they begin to roll out 2026 model year vehicles, typically in October. This is why I noted above that I consider motor vehicles to be a special case.
In any case, the broader point is that the price increases seen in June may represent just the beginning. I anticipate that tariff-related consumer price hikes are likely to intensify in July and August.
CPI versus the PCE Deflator
As already noted, the weight of the imported goods group is noticeably larger in the PCE deflator than in the CPI. As a result, the impact of tariffs-related price increases should be greater for the former, which is the Fed’s preferred price gauge. This shows up in the contribution of each line item to the aggregate in June, calculated as the product of the weight and the monthly percent change (Exhibit 3).
Exhibit 3: June Contributions for Imported Goods Line Items
Source: BLS, BEA.
Most of these line items carry tiny weights and thus individually do not move the needle for the aggregates. However, when taken together, given the incidence of outsized price increases seen in June, the magnitude of tariff-related inflation was becoming significant. The aggregate impact of these imported goods categories added up to roughly five basis points for the CPI and almost 10 basis points for the PCE deflator.
This helps to explain why the core CPI rose more slowly in June than the core PCE deflator when, in most months, the reverse is the case. In June, the core CPI increased by 0.23% while the core PCE deflator rose by 0.26%. Had the 21 line items all been flat, not a bad approximation in normal times, the core inflation gauges in June would both have been in the “low” +0.2% range that is roughly consistent with 2% annual inflation.
Moreover, if, as I have suggested, the tariff-related price hikes intensify, the gap should widen further. For example, if the tariff impacts double in July from June, the core PCE deflator would be pushed up by close to a full tenth more than the core CPI.
Clear impact from tariff hikes
The detailed breakdown of the June inflation numbers shows a clear impact from tariff hikes, as consumer prices for imported goods rose sharply in many cases. The headline and core inflation aggregates rose by almost half a tenth of a percentage point for the CPI and nearly a full tenth for the PCE deflator. If more firms pass through their tariff-related costs in July and August, the inflation figures are likely to accelerate further, particularly the PCE deflator, the measure on which the Fed focuses.
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