US Inflation Outlook: Tariffs, Fed Policy, and Gold Price Dynamics

US Inflation Outlook Clouded by Tariff Impact

US inflation is expected to edge higher in July, partly driven by the pass-through of higher tariffs on imported goods. Analysts predict that the headline Consumer Price Index (CPI) is expected to rise to 2.8% year-over-year, up from 2.7% in June. On a monthly basis, it's expected to increase by 0.2%, slightly below June's 0.3% gain, driven by falling gasoline prices and a modest slowdown in food inflation.

Excluding volatile food and energy prices, the core annual inflation rate for July is expected to tick up to 3.0% from 2.9% in June. This suggests that the rise in goods inflation is no longer being offset by a slowdown in services inflation. Core inflation is also projected to climb 0.3% month-over-month, surpassing June's 0.2% increase and marking the strongest growth in six months.

Higher US tariffs have started to filter down to consumers in categories such as household goods and recreational products. However, a separate measure of core services inflation remains moderate. Nevertheless, many economists anticipate that rising tariffs will continue to gradually feed through.

The Federal Reserve's Dilemma

Federal Reserve officials face a dilemma in determining whether tariffs will lead to sustained inflation. The central bank has kept interest rates steady this year, hoping for more clarity on this impact. Meanwhile, the labor market, the other half of the Fed's dual policy mandate, is showing signs of losing momentum.

In June, signs of tariff-driven cost pressures were already emerging, with apparel prices rising 0.4% after months of declines, and footwear prices increasing 0.7%. Furniture and bedding prices also rose 0.4%, reversing a 0.8% drop in May, signaling that these higher costs are starting to be passed on to consumers.

Economists suggest that this is just the beginning of the price adjustments, and it remains unclear how the higher tariffs will ultimately be distributed between end customers, domestic sellers, and foreign exporters. Additionally, increasing consumer fatigue is making it more difficult to pass on price increases broadly.

Ongoing Tariff Impact Expected

A recent report from the Yale Budget Lab indicates that the average effective tariff rate in the US is currently around 18.6%, the highest since 1933. Goldman Sachs expects tariffs to continue to lift monthly inflation, projecting a monthly core CPI inflation rate between 0.3% and 0.4%. Apart from the tariff impact, the bank also expects a further decline in underlying trend inflation this year, reflecting waning contributions from housing rents and the labor market.

Gold Price Outlook

Gold prices edged higher on Tuesday after a sharp fall in the previous session, as investors awaited US inflation data. Gold prices fell 1.6% on Monday, with futures sliding more than 2% after President Trump signaled he would not impose tariffs on imported gold bullion, easing market jitters.

Market participants will be closely watching upcoming Federal Reserve interest rate decisions, which have largely been priced in with expectations of a rate cut in September. A slightly lower than expected core CPI print could support rate cut expectations further, potentially reducing the cost of holding gold. Technically, indicators suggest that gold could find solid support near the $3353-$3350 area, while the $3400 mark continues to pose a strong resistance.