The July US CPI inflation came in at 3.4%, which is exactly as forecasted. Core reading, which took out food and energy and arrived at 2.5%, also matched the analyst consensus. This inflation report generally offered no surprise to the market.
Looking at the major-component breakdown, energy prices continued their MoM decline; food inflation also decelerated; meanwhile, services ex-energy and core goods both saw faster but still moderate price growth. In general, this is a stable inflation profile which won’t increase the Federal Reserve’s urgency to hike the policy rate.
The picture of inflation breadth is telling a similar story. If we slice 179 CPI components into three categories—YoY growth rate above 3%, between 1% and 3% or below 1%—we can see that while the share of above 3% is still too high at 50%, it has remained roughly the same; at the same time, the below 1% share also stalled at 29%. Again, a very stable overall picture.
But under the hood, something interesting is happening in the core goods inflation breadth distribution. In the last year or so analysts have paid more attention to core commodities because it is the subset that was most directly impacted by the Trump administration’s tariff policy.
Indeed, the tariff policy led the share of above 3% inflation in this 66-item category to spike since the second half of last year and to peak this April at a share of close to 55%.
In July, the above 3% ratio receded to 44%. But what’s interesting in the core goods inflation breadth is actually the dynamic of the below-1% share—in June it shot up to 39% and continued to stay there last month.
Elevated inflation and disinflation happening at the same time, just in different categories of goods—this is what a one-time tariff effect coming in waves looks like! Some tariff passthrough has almost gone through its full process, while others are only starting to pass the tariff surcharge to consumers.
We can observe the struggle between the two forces with a deeper subcomponent breakdown:
Household furnishings and supplies (which include products like floor coverings and furniture) is a good example. From November to April, the subcategory was dominated by above 3% inflation, then in the last two months it was dominated by below 1%. A similar dynamic also happened in the vehicles and parts subcategory.
On the other hand, we can see a fresh wave of above-3% readings dominating the subcomponents of apparel and recreation commodities since the start of the year. The tariff passthrough is still ongoing in these two subcategories as the below 1% ratio has yet to rebound.
The story here is that while tariffs bring only a one-time impact on inflation, it doesn’t mean the effect would necessarily come all at the same time. It sometimes comes in waves across different products. This is especially true under a universal tariff regime that has continuous adjustments. For example, a new set of 50% tariffs against some Canadian products is set to start next week on August 19.
The usual caveat for using inflation breadth: it is an unweighted reading of the inflation process. Items in our usual CPI inflation are weighted by how much the economy typically spends in a month, so vehicles and parts has a relative importance of about 7.5% while recreation goods has only a weight of about 1.7%. That is, CPI represents how much the price changes of certain goods and services impact your overall cost of living in a month.
In inflation breadth analysis, it is a count of how many items show inflation at a certain rate; it is good for catching how many products and services are impacted by a certain economic shock and for how long, which is why it is a good tool to observe the tariff impact.
