The U.S. inflation landscape is showing signs of renewed pressure as goods and services respond to evolving tariff dynamics and shifting consumer behavior. According to a report from Wells Fargo Economics, the core Consumer Price Index (CPI) rose by 0.3 percent in July, marking the strongest monthly gain in six months. This uptick would push the year-over-year core inflation rate back to 3 percent, underscoring a resurgence in goods inflation amid softening disinflationary trends in services. Headline CPI is expected to rise by a more moderate 0.2 percent for July, largely tempered by falling gasoline prices and a cooling in food inflation. If realized, the year-over-year rate would hold steady at 2.7 percent—slightly firmer than spring levels but still below figures seen earlier in 2025.
Recent data highlights a changing dynamic in the inflation equation. Goods inflation, long restrained by subdued vehicle pricing and businesses absorbing tariff costs, is beginning to firm. The July core goods CPI is estimated to have risen by 0.3 percent, with notable strength in import-heavy categories such as apparel, recreation, and household furnishings. Vehicle prices, which have acted as a drag in recent months, are expected to post a modest 0.1 percent increase, reflecting more balanced inventory and sales trends.
Meanwhile, tariff pressures are adding to the inflation picture. In June, tariff revenues as a share of merchandise imports crossed into double digits, signaling increased cost burdens on importers. With the average effective tariff rate likely to climb following early-August trade announcements, further pass-through to consumer prices is expected over the coming quarters.
While goods represent roughly one-quarter of the core CPI, services remain the dominant component. Here, inflationary momentum is beginning to rebound after a period of relative cooling. Core services prices are projected to have risen 0.3 percent in July—above the 0.2 percent average recorded since March. Travel-related categories, previously dampened by weak consumer sentiment, are likely to have normalized in July as seasonal patterns resumed.
Analystes note that shelter inflation remains steady. Monthly increases in rents and owners’ equivalent rent have averaged 0.3 percent since the beginning of the year, a trend that Wells Fargo expects to persist through year-end. However, other service categories continue to exhibit disinflationary tendencies. Healthcare services inflation is anticipated to ease slightly due to slower compensation cost growth, while inflation in motor vehicle insurance is projected to weaken further as repair and replacement costs stabilize. Despite these fluctuations, overall inflation is expected to drift higher in the second half of the year. Both the core CPI and the core Personal Consumption Expenditures (PCE) deflator are forecast to return to approximately 3 percent by the fourth quarter. However, the longer-term trajectory remains uncertain.
Based on the report, consumer fatigue is becoming more apparent, with inflation-adjusted spending stalling over the first half of 2025. This may make it more difficult for firms to raise prices, even in the face of rising input costs. Meanwhile, the allocation of tariff-related cost burdens between consumers, sellers, and foreign exporters remains unresolved. Compounding the challenge is increased volatility in inflation data reporting. The Bureau of Labor Statistics has temporarily suspended data collection in three metropolitan areas and reduced sampling elsewhere by 15 percent due to budget constraints. While not expected to create a systematic bias, these changes may result in greater month-to-month variability in the data. As the Federal Reserve weighs persistent inflation pressures against signs of labor market fragility, the path forward grows more complex. With tariffs feeding through to prices, services inflation showing mixed signals, and consumer demand softening, the central bank may face growing difficulty in maintaining policy balance through the end of the year.
