President Trump has pursued aggressive trade policies such his inauguration, including the imposition of widespread tariffs. The Trump administration has argued that these measures would rebalance trade relations and kickstart the American economic growth. However, the ripple effects of these tariffs are now being seen in inflation data, specifically the personal consumption expenditures (PCE) price index. In July, core inflation rose to a 2.9% annual rate, a 0.1% increase from June and the highest annual rate since February. While this is in line with the forecasted rate, this increase signals that the tariff related costs are making their way to consumers.
This places the Federal Reserve in a challenging position. With the inflation above 2%, the central bankers benchmark and concerns surrounding the job market growing, the federal reserve could still cautiously cut rates. The strength of the labor market will be the determining factor for rate cuts as stated by Morgan Stanley's Ellen Zentner, with the odds stilll favoring a September cut.
In order to avoid long term strain on the market, policymakers may have to offset the effects of the tariffs with incentives or other targeted relief. Without this, consumers could continue to bear the brunt of the higher prices due to the elevated inflation rates and economic momentum could slow.
Source: https://www.cnbc.com/2025/08/29/pce-inflation-report-july-2025.html
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