Tariff Effects Begin to Emerge, Delaying Fed Action Until Broader Impacts Unfold
Rising CPI reinforces Fed caution. Inflation showed early signs of tariff-related pressure in June, with headline CPI rising to 2.7 percent year over year and core CPI reaching 2.9 percent. The pickup in core goods prices suggests that cost pass-through is beginning to take hold in categories directly exposed to trade measures, such as appliances, consumer electronics, sporting goods and toys. Businesses may continue raising prices in the second half of the year as inventories turn over and higher input costs filter through. This potential for renewed goods inflation comes at a time when services inflation remains elevated. In this environment, the Federal Reserve is likely to delay rate cuts until there is greater clarity on the impact of tariffs on inflation.
Escalating goods prices pressure retailers. Goods inflation climbed across both durable and nondurable categories in June, underscoring broad pricing pressure. High-turnover items such as sporting goods and personal care products rose 1.4 percent and 0.3 percent month over month, respectively. Longer-cycle goods also posted increases — appliances climbed 1.9 percent, audio equipment 2.9 percent and video equipment 4.5 percent — indicating elevated production costs are flowing through to consumers. Meanwhile, vehicle prices declined in June, suggesting that some goods are still working through older inventory despite rising input costs. Amid renewed cost pressures and soft consumer demand, retailers may continue to face strain, as the sector saw negative net absorption in the first half of 2025. Even so, national retail vacancy remains below 5 percent, and leasing activity has held relatively steady, indicating ongoing tenant backfilling
Travel demand shifts amid global uncertainty. Economic and geopolitical risks continue to weigh on leisure travel. In June’s inflation report, airline fares fell 3.5 percent year over year, while the hotels and motels category declined 3.7 percent. This coincided with a 3.4 percent year over year drop in international arrivals to the United States during June, signaling heightened caution among global travelers. Hospitality markets that attract a disproportionate share of foreign visitors — such as Miami and New York City — are likely to face the steepest demand declines. In contrast, inland markets less reliant on international tourism may feel less pressure, while properties catering to domestic leisure demand could see modest gains as travelers favor shorter, local getaways.
* Date of July jobs report Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; CME Group; Federal Reserve; Moody’s Analytics; Real Capital Analytics; RealPage, Inc.