Tariffs now more visible in inflation data, Fed finds

Researchers at the Minneapolis Fed said tariffs are now driving inflation pressure comparable to the surge in AI investing, updating their conclusions from April, when the impact of tariffs was less visible..Reviewing PCE price data through July, authors Neil Mehrotra and Michael E. Waugh found the relationship between core goods inflation and tariffs turned “markedly positive.”“This is driven by a handful of heavily tariffed categories that are showing greater excess inflation, especially in apparel,” the authors said. “In the category of clothing and footwear, year-over-year inflation rose from 0.3 percent in December 2025 to 3.5 percent in July 2026. Prior to the pandemic, inflation in the category was close to zero.”While the inflationary effect of tariffs is more visible than it was earlier in the year, it only accounts for 0.2 to 0.4 percentage points of core PCE inflation, in-line with an August finding from the St. Louis Fed. “Our calculation means that absent tariffs, core PCE inflation [of 3.3 percent] would still be about 1 percentage point above the Fed’s 2 percent target. It also suggests that some of the worsening in core PCE inflation in the first half of 2026 was due to delayed tariff pass-through,” Mehrotra and Waugh said.Concurrently, AI-driven demand remains an inflationary force. Prices for video and information processing equipment—a category largely free from tariffs—skyrocketed 12.2 percent year-over-year, reversing pre-pandemic decreases of -6.5 percent annually. “This swing is enough to add another 0.4 percentage points to core PCE inflation,” the authors said.