First signs of tariffs in July inflation data, but no need to over-react

With all of the key July inflation data released, we are seeing the first evidence that tariffs are starting to flow through to prices. That said, underlying leading indicators do not point to a large or sustained tariff impact. With only about three Fed cuts priced in by March 2026, we think the risk-reward still favors betting on more Fed easing as the US labor market slows (link) and housing remains weak (link).

The PPI and import price data released this week surprised to the upside but don't look extreme in level terms. After a few months of flat price levels, the latest uptick shows these prices rising in line with trend. The same holds true of CPI data released earlier this month.

Leading inflation indicators suggest limited upside risks beyond the next few months. For example, the Fiber Leading Index and prices paid component of the ISM manufacturing survey have both rolled over in the past few months and remain well below 2022 levels. The “Higher Prices" sub-components of the ISM surveys have also turned down after spiking earlier this year.

We've also highlighted downside risks to housing, which in turn will weigh on shelter inflation via lower home prices and rents (see here).

Our main inflation LEI confirms that upside risks are limited from here. The headline and core series remain above target but stopped rising after April.

Stepping back, its worth noting that aggregate US inflation surprises are actually negative. Plus the diffusion of our leading inflation inputs imply global inflation surprises are biased to the downside for the next six months.

Client can see all of our key charts in our US Inflation chart collection.