Tariffs Will Push US CPI Higher, But Only Briefly and in Specific Sectors

Despite a broad disinflationary backdrop in the US economy, recent data confirm that the new tariff regime is creating a narrow but meaningful inflation impulse. Customs tax receipts, retail price indices, shipping costs, and product level tariff rates all point to a CPI acceleration in Q325. However, the impact will be concentrated in specific goods and fade quickly due to falling aggregate demand.

The US Customs tax collection chart shows a vertical jump in tariff receipts beginning mid May 2025. This inflection coincides with the formal rollout of the fully phased-in tariff regime, raising the effective rate on key commodity imports. The sharp trajectory confirms that importers are paying significantly more at the port well beyond historical norms and that these payments are no longer hypothetical policy lines, but real economic frictions. Notably, this spike is occurring even as container volumes from China are falling. This isn’t because trade is collapsing, but because sourcing is diversifying: importers are shifting supply chains toward countries like Vietnam and Mexico to mitigate tariff exposure. That tariff collections are rising amid falling Chinese volumes suggests the US is collecting more duties per container a reflection of higher tariff rates, not import surges. This underscores the intensity of the policy shock and its ability to raise unit costs, even as aggregate demand and volume weaken. It's not statistical noise it's fiscal extraction at scale, and it forms the foundation for the downstream price pressure expected in retail and CPI data over the coming months.

Using realtime pricing data from Cavallo, Llamas, and Vazquez (2025), we see imported goods rising faster than domestic goods since early March 2025, although both indices have dipped modestly since the May 12 tariff pause with China. This temporary pullback highlights the fragility and policy sensitivity of retail pricing. The divergence began shortly after the formal rollout of higher tariffs on categories such as electronics, auto parts, and intermediate goods, where import prices rose faster than domestically sourced products. Cavallo's updated dataset through May 23, covering over 330,000 products across four major US retailers, reveals that while tariffs drove a price surge in March and April, retailer pricing power has since waned as consumers pull back. The postpause price softening suggests some pass-through was front-loaded, but it does not eliminate the inflation impulse already embedded in goods CPI prints. Rather, it reinforces that the effect is shallow and fleeting. The realtime nature of the data offers crucial insight into how price transmission reacts to political shifts, retailer absorption strategies, and consumer demand limits, before it appears in official CPI.

Source - Cavallo Research Paper (2025)

Bloomberg's sector level tariff chart reveals an intensely skewed structure of tariff enforcement, with enormous spikes in categories central to industrial technology and consumer electronics: lithium-ion batteries (28.2%), electric vehicles (28.1%), and ceramic capacitors (34.6%). These items are deeply embedded in downstream sectors, including auto manufacturing, energy storage, and semiconductors. In contrast, tariffs on more discretionary or low margin consumer items like toys, Christmas ornaments, and even smartphones remain low, mostly under 5%. This strategic targeting underscores the administration’s dual goals: to curb Chinese industrial dominance in high value tech and to limit direct consumer price backlash. The CPI impact, therefore, will be narrow but potent, primarily affecting durable goods and capital intensive imports. Core goods inflation will likely reflect this asymmetry, showing upward pressure in electronics, auto parts, and manufacturing inputs, while other CPI subcomponents remain anchored.

Source - Bloomberg

Additional data confirms that the US effective tariff rate on Chinese goods has surged to over 26%, while rates on other key trade partners, including Canada, Mexico, and the EU have remained largely unchanged. This asymmetry illustrates a deliberate policy design aimed at penalizing specific sectors of Chinese exports, particularly in areas like auto components, consumer electronics, and intermediate goods without creating a broadbased inflationary ripple across all imports. The result is a concentrated inflationary impulse, where only the most exposed goods categories experience significant price pressures. This concentration helps explain why CPI may rise modestly but not uniformly. It also reinforces the argument that future inflation dynamics will hinge not on broad overheating, but on how intensely tariff policy distorts relative prices within the core goods basket.

Source - Bloomberg

Goods consumption is forecast to go negative starting Q225, reversing the brief rebound seen in late 2024. Meanwhile, services demand, which had been resilient throughout the post-pandemic normalization, is also showing signs of fatigue, with sequential deceleration expected through the second half of the year. Real personal consumption expenditures (PCE) are falling, reflecting both declining goods volumes and plateauing service activity. On the trade side, container departures from China to the US have plummeted to their lowest level in over a year, despite relatively full ships. This signals that while capacity utilization remains high, the aggregate flow of goods is shrinking. Importantly, this collapse is not driven by a shift to domestic production alone, but by broad based demand weakness and strategic sourcing diversification. As tariffs on Chinese goods surged past 26%, importers began shifting sourcing toward Vietnam, Mexico, and other low tariff jurisdictions. This substitution effect is evident in stable or rising container traffic from other trade partners, even as Chinese origin volumes shrink. The result is a mix of inflationary impulses: China linked goods become more expensive, while others replace them at potentially lower cost but not without short-term disruption and repricing. In short, this is not an overheating economy. Instead, it is a cooling macro environment, one where elevated tariffs and shipping costs are colliding with weakening household balance sheets and cautious retail restocking. The result is a policy-induced supply shock layered on top of softening aggregate demand, a textbook recipe for short-term stagflationary dynamics

Source - Morgan Stanley

Tying it all together, the Cleveland Fed inflation tracker shows May 2025 Core CPI at 0.23% MoM and Core PCE at 0.21% MoM flat from April. This reflects the fact that inflation, for now, remains contained at the aggregate level. However, this apparent stability masks underlying sectoral pressures. Realtime retail price data already show imported goods rising faster than domestic, while customs receipts confirm elevated import costs, and freight rates are rebounding. Meanwhile, tariffs on high-impact product categories are now embedded in the supply chain. Retailers, who had initially absorbed these rising costs, are increasingly constrained, and as inventories shift from pre tariff to post tariff stock, passthrough will begin to show up in CPI.

Source - CFED

Even though CPI is expected to rise in the near term, it won't be because the economy is running hot or consumer demand is booming. Instead, the CPI bump will be the result of a policy driven supply side cost shock (i.e. tariffs, freight costs) combine with some base effects, not genuine inflationary overheating. So it’s transient, not structural. The Fed is likely to look past the near term CPI bump, given weakening consumption and the targeted nature of price increases. Unless services inflation or wages reaccelerate, this tariff shock is unlikely to shift current policy higher but it does delay future rate cuts. Markets now expect approximately 50bps cuts total for 2025 down from 75bps at the start of the year.

Source - CME

CPI will rise modestly due to tariffs, but not sustainably. The policy shock is visible, measurable, and real. But the macro context narrative is growing, weak demand, soft consumption, and flat wages, ensures the spike will be shallow and temporary. Markets and the Fed should read it accordingly.