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Economic Insight
13.11.2025
Rising inflation readings in the US indicate that tariffs are boosting consumer prices, with prices of core goods, particularly durables, rebounding in the last few months. However, the overall impact is being softened by an ongoing deceleration in shelter inflation and lower oil prices. A St. Louis Fed study shows that tariffs have added around 0.5% to PCE inflation (latest estimated at 2.8% y/y), halting progress in returning inflation back towards the Fed’s 2% target, a trend that was underway pre-tariffs. Looking ahead, the tariff passthrough to consumer prices should continue for several more months, with the extent hinging on the durability of the strength in consumer spending. A further slowdown in shelter inflation and lower oil prices could put downward pressure on inflation in 2026, but consensus estimates indicate that inflation will remain elevated at almost 3% next year, firmly above the Fed’s 2% target.
Goods inflation has been rising fast, but shelter disinflation has softened the blow to overall inflation
The CPI inflation rate in the US has been steadily increasing (latest 3% y/y in September) since hitting a post-pandemic era low of 2.3% in April, i.e. before new tariffs started to have an impact, and a similar trend can be seen in core inflation. Still, the overall pickup in inflation has been smaller than worst-case fears after the Trump administration imposed steep tariffs on almost all imported goods. Key reasons for that are sustained disinflation in the heavyweight shelter component (from 4% y/y in April to 3.6% in September) and lower oil prices (WTI averaged $64 in the April-October 2025 period compared with $76 in 2024). However, inflation in other categories such as core goods and durables has accelerated in the last few months. In fact, the headline rate excluding shelter almost doubled to 2.7% y/y since April and core inflation excluding shelter increased from 1.8% in April to 2.6% in September, close to the highest in more than two years.
As mentioned, several other categories have witnessed price spikes due to a partial pass-through of tariffs, although the full impact will continue to be felt over the coming months. Core goods (i.e. excluding food and energy), which were on a solid disinflationary trend, have rebounded, with price increases accelerating to 1.5% y/y by September from 0% in March 2025. The tariff impact is more strongly evident in another narrow measure of goods, durable goods, where inflation flipped from -1% y/y in March to +1.8% in September. Vehicles, apparel, toys, appliances, and furnishing items are some items that are witnessing the most profound tariff impact.
A recent St. Louis Fed study estimated that businesses shared around 35% of the tariff burden with consumers by August while rating agency S&P Global projects at least two thirds of the tariff burden to be eventually borne by households. Importantly, the St. Louis Fed study shows that tariffs added 0.5% to annualized PCE inflation over the June-August period, which stood at 2.85%. Another factor that has likely contributed to driving prices higher has been a weaker US dollar, with the US dollar index (DXY) falling by 8.3% YTD, pushing import prices up. Still, at least some of this currency drop could also be attributed to tariffs, given the chaotic and uncertain rollout out of the duties this year.
Meanwhile, although not necessarily due to tariffs, the disinflation in services excluding rents that had been under way has reversed with inflation climbing to 3.7% y/y in September from 3.3% in April. Services such as medical care, airfares, hotel accommodation, and recreation have mostly contributed to that. For example, on a three-month annualized basis, airfares are up over 60% while hotel accommodation prices jumped by 12.5% between July and September. Moreover, medical services inflation climbed from 2.7% y/y in January to 3.9% in September, with recreation rising to a near two-year high (3% in September), highlighting the stickier nature of many services prices outside of housing. This could be partly related to the sharp decline in the foreign-born labor force given the US administration’s immigration policies, as well as the broader resilience of consumer spending so far this year.
The big picture is that inflation did not rise sharply, partly due to some disinflationary forces mentioned earlier, but that tariffs and potentially other supply-side-related policies have stopped inflation from moving closer to the Fed’s 2% inflation target, staying instead closer to 3%.
Consumer spending strength to impact tariff passthrough as softer shelter & oil prices keep a lid on inflation
Looking ahead, the tariff passthrough to consumer prices (especially core goods) should continue for several more months, impacting the inflation numbers. Obviously, the durability of the current strength in consumer spending, the ongoing resilient economic growth backdrop, and the evolving job market conditions would influence the extent of that additional passthrough to goods prices, and hence the inflation trajectory over the coming months. Meanwhile, services prices excluding shelter would also be impacted by the resilience of consumer spending and economic growth at large.
As for shelter (the largest component in the CPI basket), the disinflation should continue over the coming months, based on leading rental indicators and the current trend in house prices, putting downward pressure on headline inflation. In addition, another disinflationary impulse may come from a further drop in oil prices as per the consensus view of the oil market outlook. For example, the US Energy Information Administration forecasts the WTI oil price will drop significantly in 2026 to average $48.5 compared with $65 in 2025 (although this is price forecast is one of the weakest in the market).
Importantly, prioritizing its employment mandate, the Fed has turned dovish and cut interest rates twice since September with the market still expecting three more cuts by end-2026. Whether these cuts will materialize is obviously uncertain but what is certain is that the appointment of a new Fed Chair in May 2026 will strengthen the dovish bias at the bank. This monetary policy easing will be a factor putting upward pressure on inflation going forward. Amid all these factors, we note that consensus estimates are for headline inflation to remain elevated at close to 3% on average during 2026, equal to the latest reading (September). With the Fed cutting rates when inflation has remained above the 2% target for more than four years and expected to remain so for at least another two years as per the Fed’s projections, the credibility of the official 2% inflation target could be increasingly on the line.