Initially delayed, the pass-through of tariffs to consumer prices has arrived

gist

Minneapolis Fed economists Neil Mehrotra and Michael E. Waugh update their April finding that tariffs could not explain elevated goods inflation. PCE data through July now show delayed pass-through: higher-tariff categories, especially clothing and footwear, exhibit excess inflation and add 0.2 to 0.4 percentage points to core PCE. Even without tariffs, core would remain about a point above the Fed’s 2 percent target. Tariff-light video and information-processing equipment is up 12.2 percent as AI-driven demand for memory and computer hardware contributes another 0.4 points, matching the tariff effect.

ideas

• Pass-through was delayed, not absent. The tariff-inflation scatter was flat through December 2025; by July 2026 it is positive, led by clothing and footwear jumping from 0.3 percent to 3.5 percent year over year.
• Tariffs explain only part of the overshoot. Fitted pass-through adds 0.2 to 0.4 percentage points to core PCE; without tariffs, core would still sit about a point above the Fed’s 2 percent target.
• AI hardware is a co-equal inflation source. Video and information-processing equipment, largely tariff-free and 2.4 percent of core PCE, is up 12.2 percent after years of falling prices—another 0.4 points, matching tariffs.
• More pass-through is still in the pipeline. New motor vehicles have not yet repriced, auto-parts tariffs were just announced, and a New York Fed survey finds firms planning further increases.
• Core is at a multi-year high. Core PCE is 3.3 percent year over year through July, the highest since 2023 and, outside the pandemic, the highest since the early 1990s; core goods add more than 0.7 points versus the 2015–19 baseline.

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