Increasing Costs: Identifying the Goods and Services Contributing to Inflation
In July, the Consumer Price Index (CPI) revealed a mixed bag of price trends, with some categories experiencing a rise in costs while others saw a decrease.
Egg prices continued to fall, decreasing by 3.9% in July, offering some relief to consumers. However, the shelter index contributed to inflation, rising 0.2% in July, according to the Bureau of Labor Statistics.
Medical costs were on the rise, with the medical care index up 0.7% due to higher prices for hospital and dental services. This increase was reflected in the index for owners' equivalent rent and the index for rent, both of which rose 0.3% in July.
Grocery prices overall declined in July, except for milk (up 1.9%) and beef (up 1.5%). The food away from home category, which includes meals at restaurants and bars, also rose 0.3%. Prices for household furnishings (+0.4%) and apparel (+0.1%) increased as well.
Energy costs declined 1.1% as gas prices dropped 2.2% in July. Despite the in-line data, the CPI report indicates that prices are still rising faster than consumers and the Federal Reserve would like.
The CPI was 2.7% higher year over year in July, unchanged from the month prior. This figure, while within the Federal Reserve's target range, is higher than what was seen in previous months.
Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, stated that inflation is on the rise but didn't increase as much as some people feared. Zentner also suggested that over the longer term, we likely haven't seen the end of rising prices as tariffs continue to work their way through the economy.
Bill Adams, chief economist at Comerica Bank, suggests that the impact from President Trump's tariffs on inflation is yet to be determined. However, experts predict that as inventories dwindle and firms’ profit margins tighten, tariff-related price increases will increasingly pass through to consumers over coming months and years, causing a more sustained inflationary effect.
Looking ahead, the future forecast suggests tariffs will remain a persistent inflationary factor unless trade negotiations lead to tariff reductions. Analysts indicate that only broad trade agreements reducing tariffs could alleviate upward price pressure and potentially ease inflation. Otherwise, tariffs are expected to maintain elevated consumer prices particularly in affected sectors and contribute to inflation dynamics given the lack of full substitution away from tariffed goods.
The Federal Reserve’s monetary policy response will also influence the net effect on inflation and real incomes, possibly through interest rate adjustments or nominal income changes.
This assessment reflects data and expert commentary as of August 2025. Between 2000 and 2020, annual inflation in the U.S. averaged 2.1%, higher than the Federal Reserve's inflation target of 2%. It is important to note that these trends are subject to change as trade negotiations and economic conditions evolve.
[1] Source: Federal Reserve Economic Data (FRED) [2] Source: Peterson Institute for International Economics [3] Source: Congressional Budget Office [4] Source: Brookings Institution
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