Inflation watch is...sort of back? But billions in tariffs still aren't affecting prices much

After Tuesday's release of the CPI for June, can we say that inflation watch is back?

The consumer price index, a broad-based measure of goods and services costs, increased 0.3% on the month, putting the 12-month inflation rate at 2.7%, the Bureau of Labor Statistics reported Tuesday. The numbers were right in line with the Dow Jones consensus, though the annual rate is the highest since February and still above the Federal Reserve’s 2% target.

Excluding volatile food and energy prices, core inflation picked up 0.2% on the month and an annual rate of 2.9%, with the annual rate in line with estimates. The monthly level was slightly below the outlook for a 0.3% gain.

Before June, inflation had been on a generally downward slope for the year, with the headline CPI at a 3% annual rate back in January and progressing gradually slower in the subsequent months despite fears that Trump’s trade war would drive prices higher.

As you can see, the year-over-year increase in overall consumer prices has been consistently between 2.4% and 3.0% for the last year, and the 12-month change in "core" prices has been just under 3.0% for most of 2025 after being slightly over 3% for the last half of 2024.

The higher inflation reading led to a 400+ point loss in the DOW Jones, and the 30-year bond yield to rise past 5%, as higher inflation can result in fewer interest rate cuts from the Fed. Some of the conjecture was that the cost of tariffs were starting to see their way onto store shelves, but June's larger increases in the CPI came from fruits and vegetables, gasoline, and hospital services, which aren't as susceptible to tariffs as other products.

I wanted to look into the next day's Producer Price Index report to see if tariffs were pushing up costs for businesses that might be importing products to be manufactured here, as that could tell us if we could expect those increased costs to be passed onto consumers in the months to follow. But at least for June, that wasn't happening.

A measure of wholesale prices showed no change in June, providing a conflicting sign over whether tariffs threaten to boost inflation in the coming months.

The producer price index was flat, according to seasonally adjusted numbers from the Bureau of Labor Statistics reported Wednesday. Economists surveyed by Dow Jones had been looking for an increase of 0.2%.

Though the numbers for headline and core wholesale inflation were subdued, final demand goods prices rose 0.3%, but were offset by a 0.1% fall in services. Within the goods category, tariff-sensitive communication equipment posted a gain of 0.8%. Core goods prices also rose 0.3%.

At the same time, the PPI level for May, initially reported as a 0.1% increase, saw an upward revision to a 0.3% gain. A 0.3% gain for goods is the biggest gain since February, the BLS reported.

So that's an interesting cross-pressure, and a sign of some weakness in the transport side of the economy, since the price of transportation and warehousing services for businesses saw a drop of 0.9% in June.

The part that makes me confused about the inflation numbers is that the US government has seen a significant increase in tariff revenue since Trump took office, including in June.

So the amount of tariffs paid in the US is 3-4 times what it was at the start of the year, but we have yet to see much of a significant increase in prices for products at the producer or consumer level - it's basically what it was before the tariffs hit. So are businesses eating a bunch of profits, or is worker productivity through the roof and allowing for unit labor costs to be less, which would make up for the cost of tariffs?

There's a disconnect going on here. Figuring out what the story is that puts these conflicting pieces together will tell us if our economy is heading toward inflation or stagflation. Or if we end up in some kind of positive situation that would fly in the face of almost all economic history that has happened when sizable levies are put onto an imported product in a country that has such a large amount of imports be part of its supply chain.

Maybe tomorrow's import price index report starts to fill in the blanks. Something should soon.