Truflation: US Monthly Inflation Report – July 2025

Executive Summary

Despite the second quarter GDP growth, the figures have some worrying trends that suggest that the US economy is heading into a period of noticeably slower growth which is likely thanks to the impact of tariffs on inflation, the tightening of the labor market and as a consequence shrinking consumer spending.

With the price increases occurring as a result of the new tariff policies, it will eat into real incomes, at a time when consumer spending is starting to look a bit shaky.  Monthly retail sales and personal spending have started to cool in the last couple of months, despite the increase in prices. It is evident that spending on balance has stagnated for the first six months of the year which rarely happens outside of a recession.

Exhibit 1 – Retail Sales & Personal Spending Percentage Change on a MoM basis

Source: Census Bureau, Monthly Trade Report & BEA, Personal Income and Outlays Report

The advance estimate of the second quarter GDP was 3.0% which rebounded significantly (compared to Quarter 1 which declined -0.5%) and is primarily a reflection of the downturn in imports but it is the consumer spending which accounts for two thirds of the US economy which has experienced an acceleration this quarter but still is muted. This growth has been offset by the downturn in investment.

Exhibit 2 – GDP Growth & Person Consumption Expenditures Percentage growth from preceding period

Source: Bureau of Economic Analysis, GDP Report

In addition, signs of a weakening labor market are appearing with the unemployment rate ticking marginally higher to 4.2% and nonfarm payroll growth was lower than expected with 73,000 jobs added for July compared to 100,000 expected.  The three-month rolling average of the nonfarm payroll has been declining since the beginning of the year as tariffs ramped up.

Exhibit 3 – Three Month Rolling Average Job Creation & Unemployment Rate

Source: Bureau of Labor & Statistics, Employment Situation Report

There are few signs of strength in the July employment report, with gains coming primarily from health care, a sector that has continued to show strength in the post covid world.  The sector added 55,000 jobs, easily leading the way. Social assistance also contributed 18,000 jobs.  The two sectors combined for 94% of the job growth. The Federal Government on the flip side continued to decline with 12,000 less jobs for July and 84,000 less since its January peak. According to the latest Challenger Grey and Christmas report, which tracks monthly job cuts, it highlights that employers cut 62,075 jobs in July, which is up 29% from the previous month, and 140% higher than this time a year ago.

In addition, the long term unemployment has heated up with the average weeks unemployed jumping to 24.1 weeks, the highest level since April 2022, while the level of those out of work for more than 27 weeks climbed to 1.82 million, the highest since December 2021 and represents 1/4 of all the unemployed people.

Average hourly earnings have increased 0.3% MoM meeting the estimate, though the yearly gain of 3.9% was slightly higher than expected. This salary growth is offsetting the spending and keeping savings rate stable at 4.5%.  With more Unions negotiating salary increases (Unite Here Local 11, International Association of Machinists and Aerospace Workers etc) combined with last year’s negotiations having their second year of increases we are likely to continue to see upward pressure on wages in the near future.

Overall, the various labor reports do add weight to the sign of a slowing and persistent cooling trend in the economy.  It is certainly not in a crisis, but the hiring momentum continues to soften and pressures are beginning to build.  The question is to what extent this cool down is likely to persist.

The Federal Reserve’s recent decision to maintain current interest rates has certainly met with opposition from both Governor Bowman and Governor Waller, both of whom have advocated for the Federal Reserve to start easing. In addition, Mary Daly, the San Francisco Federal Reserve Bank President, has added further pressure saying that the time is nearing for interest rate cuts, in the wake of the mounting evidence that the US job market is softening.  This coupled with the recent reports on employment and inflation, the pressure will increase further for September cuts, especially with two more inflation and labor reports due before then.  The current CME FedWatch tool shows an 88% expectation of a quarter percentage point cut in September.

Household Debt and Credit Status

As much as consumer spending has marginally increased, the total household debt has risen to $18.39 trillion in the second quarter, an increase of another $185 billion, according to the latest Quarterly Report on Household Debt and Credit. The two main drivers of the increase continue to be mortgages and credit card debt, pointing to continued lender optimism in extending consumer credit.

But that expansion came with rising signs of financial pressure, as 4.4% of outstanding debt was in some stage of delinquency. Student loan delinquencies surged as paused missed payments resumed reporting.  The share of seriously delinquent student debt jumped to 12.9%. In addition to this more than 2.2 million borrowers saw their credit score rating fall by over 100 points and 1 million lost at least 150 points.  These credit shocks will no doubt have an impact on consumer spending.

Exhibit 4 – Total Balance by Delinquency Status

Source: Federal Bank of New York, Household Debt and Credit Report

Looking at the delinquency rates of 90+ days, it is clear that unlike the Great Recession, delinquency rates for mortgage and home equity lines of credit have ticked up though the performance remains strong relative to historical benchmarks and aren’t the problem yet. However credit cards, auto loans and student debt are rising and represent the concern now.

As traditional credit becomes harder to manage, younger consumers are turning to alternatives.  Buy now pay later (BNPL) usage continues to rise, especially among Generation Z and younger millennials – 58% of whom prefer BNPL over credit cards. That shift is also shaping commerce habits with 43% of shoppers now choosing merchants based on whether installment plans are available.

Exhibit 5 – Percentage of Balance 90+ days delinquent by Loan Type

Source: Federal Bank of New York, Household Debt and Credit Report

At the same time, a report by PYMNTS shows that 69% of Generation Z consumers report living paycheck to paycheck. It is not surprising to see the increase in the delinquency rates among the younger age groups which continues to rise but it is much broader with evidence showing that it is rising across all age groups.

Exhibit 6 – Percentage of Balance 90+ days delinquent by Age

Source: Federal Bank of New York, Household Debt and Credit Report

It is the millennials and zoomers that are the hardest hit by credit stress. The chart itself is very reminiscent of the credit stress that preceded the Great Recession. The difference this time is the apparent lack of mortgage stress. Together, these trends reveal a consumer credit landscape in flux. Borrowing continues to rise, but so do the risks tied to repayment, especially for younger and mid-income households navigating higher costs and shrinking buffers.

Tariff Status

Future economic growth expectation remains muted as the labor market slows but inflation remains the biggest wildcard given the acceleration from tariffs. Tariffs are increasing and are having a significant impact on inflation, especially with the import duties collected from US importers, by the US Treasury who have recorded over $27bn in customs and duties last month.  These importers have a choice to absorb the tariffs or pass them on with price hikes paid by consumers. From January through April, importers tried to hold the line on price hikes but now price hikes are increasingly evident in the data. 

Exhibit 7 – Customs Duties Paid by US Importers

Source: US Treasury (Note: Data is for gross receipts and doesn’t account for refunds)

It is likely now that the US will charge at least 15% up to 50% on all imports which are the highest levels in decades. Tariffs will rise and push costs higher for businesses and shoppers. The tariffs on goods imported into the US include:

-   50% tariff on copper imports from 1 August

-   25% tariff on steel and aluminium imports

-   25% tariff on foreign-made cars and imported car parts

On the 8th of July, President Trump threatened to impose a 200% tariff on pharmaceutical imports but no further details have been confirmed. In addition the global tariff exemption covering goods valued at $800 or less will end on the 29th of August.  The latest status of the tariffs as off the 7th of August deadline was as follows:

Data shows tariffs are already feeding into the overall inflation rate, as businesses pass on some or all of their higher costs.  Prices have been rising in May, June and now July reflecting increases in items including clothing, coffee, toys and appliances. Adidas, Nike, Mattel etc have also recently confirmed that they will be raising prices for their goods to American consumers.  The costs of goods manufactured in the US using imported components are also expected to rise, especially car parts that typically cross the US, Mexican and Canadian borders multiple times before a vehicle is completely assembled.

Exhibit 8, breaks down the various sectors, showing what is above and below the average inflation since January 2020. It is noteworthy that most of the items in the above section are services with most of the items below the average are physical goods.  You can see the biggest driver of service growth is the above average wage growth since 2020.

Exhibit 8 – Truflation Aggregated Price Changes; January 2020 to July 2025

Looking at this on a sector-by-sector basis, we can see that many of the biggest contributors to overall price increases have very specific drivers, which generally don’t have anything to do with the central bank interest rates.  It is with this environment tariffs arrive, now rising to ~15% across-the-board on most imported goods. These tariffs are a one time persistent tax on consumers that will lead to higher prices that last as long as tariffs are in effect.

Recent inflation trends

The tariffs are now evident in the hard data and with the more broader impact of tariffs likely to be felt with Canada, Mexico and China to be confirmed. The BLS Consumer Price Index Report is expected to show a continued uptick in inflation with our forecast for the end of the summer remaining at 3% on an annualized basis. This view has translated into a consistent uptick forecast with a range from 2.6% to 2.9% Year on Year. Truflation is expecting the increase to come in at 2.8% on an annualized basis with this gradual rise set to continue. 

Truflation data highlights the impact of tariffs on the prices of goods as they are the driving force of upwards movement of prices and have seen a continued acceleration, while the more volatile categories of food and energy have continued their de-acceleration as consumers look for less expensive alternatives.  Services on the other hand has seen a slowdown in prices with an increased competitiveness in the market but also remain partially stubborn given the continued higher wage growth.

At Truflation we are seeing inflation start to take a steady increase in goods, but it is being offset by the volatile categories and services. We certainly expect the prices of goods to continue to accelerate in the coming months and continue to drive inflation upwards.

Exhibit 9 – Truflation Category Inflation Drivers

With inflation experiencing a more consistent upward movement, it is clear the risks continue to be to the upside.  The most significant upward contributing categories to inflation in July are coming from Education, Utilities, Health and Alcohol & Tobacco. While Food and Housing are the biggest downward contributors. 

Sector-Specific Inflation Analysis

• Education: Prices rose +0.7% MoM and +2.9 YoY due to both educational fees and goods for education. With the increased pressure to out perform one’s peers in a marginally cooling labor market, educational goods have seen a significant increase combined with education services which are being exposed to increased operational costs (faculty salaries, admin staff and upgrading facilities).

• Utilities: Prices rose +0.6% MoM and +4.6% YoY.  Utility costs, in particular for electricity, have risen in July due to increased demand from extreme temperatures and the growth of power-hungry data centers, coupled with the rising natural gas prices and aging infrastructure.  These factors are putting more strain on the power grid and driving up costs for consumers.

• Alcohol & Tobacco: Prices experienced +0.6% MoM and +3.1% YoY increase which is driven by the tariffs on steel and aluminium combined with the import duties in particular from Canada and Mexico.  In addition to this there is an increase in tobacco prices as a result of tax hikes, particularly Indiana where the state legislature approved a $2 per pack increase.

• Health: Prices rose +0.5% MoM and +3.0% YoY. Health insurance premiums and overall healthcare costs continue to rise due to an ever increasingly aging population, the expiration of enhanced affordable care act, an increased demand for preventative care and service costs in particular wages and salaries. July is also typically a time when healthcare  insurers propose rate increases for the coming year so expect this upward trend to continue. 

• Food: Prices de-accelerated in July -0.6% MoM and +2.7% YoY given the continued declines in sugar, soybean, coffee, corn and cocoa commodity prices combined with increased competition and cutting prices offering more low cost options to attract shoppers. In addition consumers are also being more frugal in their shopping and looking to downscale their traditional brand purchases combined with hunting for bargains.

• Housing: Overall housing prices declined -0.5% MoM and +0.8% YoY.  Rentals continued to come down from record highs as supply boosts vacancy and demand slows from the record highs in 2022. The owned housing has come down as well due to rising inventory (realtor.com shows July being the 21st consecutive month of inventory growth) which provides more options for buyers, while elevated mortgage rates (in the mid 6% range) dampen buyer enthusiasm and impacting affordability. A general slowdown in the market has made sellers more amenable to price adjustments.  This creates a dynamic where buyers have increased leverage and a greater chance of finding a home within their budgets.

Longer term outlook

The next few quarters could continue to see economic growth slowing, in part due to limited growth in workers, the impact of consumer spending as a result of the tariff tax and increase in household debt.  

The workforce is in a demographic crunch and historic changes in immigration policy are underway that could result in limited economic growth unless productivity and AI gains come into play in a significant way. The decline in the labor participation rate from 62.65% in July 2024 to 62.22% in July 2025, translates to 1.2 million fewer people aged 16 and over who are working or actively looking for a job. Half of this decline is likely to be attributed to Americans retiring, but the participation rate has also fallen among those 18 to 54.  This aging population and declining labor participation also speaks to a deeper, structural challenge that will persist well into the future. According to Census projections, the population aged 18 to 64 would actually fall by over 300,000 people in the year ending July 2026 and will continue to fall roughly at that pace through 2030.  This with the recent changes to major immigration programs will not doubt drain labor supply further.

As noted in the May Inflation Report, Truflation started to see the impact of tariffs on the price of goods and expected the year on year BLS reported CPI to be accelerated to 3% by the end of the summer.  We still expect this trajectory to hold as the full effect of the tariffs come into play.  The impact of the tariffs will have the capability to drive inflation upwards and will add more pressure on economic growth.

This view seems to be equally shared by US households, whose longer term inflation outlook has deteriorated in July, according to the latest Survey of Consumer expectations from the Federal Reserve Bank of New York. The expected level of inflation a year from now rose to 3.1% from 3.0% in June. Fed Chair Jermone Powell, spoke after the two day July policy meeting, saying near term measures of inflation expectation have moved up. 

Exhibit 10 – Consumer Inflation Expectations (2% is the Fed Target)

Source: University of Michigan & Federal Reserve Bank of New York

Some Fed policymakers believe the tariff price hit will be a one-time event and favor an interest rate cut to offset rising risks to the job market. But most central bank officials have been reluctant to cut rates because of the perceived risk that long rollout and rapid shifts in tariffs could lead to more lasting inflation.

APPENDIX A

Truflation Category Percentage Change Data

Month-over-Month and Year-over-Year

All Data is based on Straight Truflation July 2025

About Truflation

Truflation provides a set of independent inflation indexes drawing on 30+ data partners/sources and more than 15 million product prices across the US. These indexes are released daily, making it one of the most up-to-date and comprehensive inflation measurement tools in the world. Truflation has been leveraging this measurement tool to predict the BLS CPI number, with a 99.94% accuracy in predicting inflation in the last 12 months.

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