Many economists and market observers have expressed surprise at the apparent absence of inflationary effects from President Trump’s economic policies.
I find this a bit puzzling, as I believe the inflationary impact is already clearly visible if one examines the data properly.
In this post, I will demonstrate why I’m convinced we’re seeing the beginning of a rather significant inflationary episode in the US economy.
After Donald Trump’s return to office, three major policy changes have occurred that I believe are significantly impacting US inflation dynamics. First, fiscal policy has been substantially eased through the “Big Beautiful Bill.” This is you might say be some unpleasant monetarist arithmetics.
Second, tariff rates have increased dramatically to nearly 20% on average for all American imports.
Third, the Trump administration has placed extraordinary pressure on the Federal Reserve to ease monetary policy. I have earlier warned to watch for a credibility (or lacks of) related spike in money-velocity.
The reason many observers haven’t noticed these inflationary effects in headline figures is primarily due to sticky prices, base effects and transitory effect of prices declines in some sectors of the economy. But as I’ll show, a more careful analysis reveals the troubling trend.
My Methodological Approach: Looking Beyond Surface-Level Data
To properly understand what’s happening with US inflation, I’ve examined three different price indices – the Consumer Price Index (CPI), the Personal Consumption Expenditures (PCE) deflator, and the Producer Price Index (PPI).
For each index, I’ve analyzed both the headline figures and the core measures that exclude food and energy prices, giving me six distinct metrics to work with.
I then calculated the median of these six indices and indexed this composite measure to 100 as of April 2025, represented by the blue line in my graph. I’ve also included a band representing ±1 standard deviation across the price series to capture statistical uncertainty.
I chose April 2025 as my indexation point because it coincides with President Trump’s announcement of substantial tariff increases on what he termed “Liberation Day.” Many of these tariff implementations were delayed until August, which means we have yet to see their full inflationary impact.
The Evidence: Inflation Is Already Accelerating
When I compare the actual inflation trajectory (blue line) with the pre-April trend (green line), which assumes continuation of the growth rate observed in the first four months of the year, I find that actual price increases have significantly exceeded projections.
Both these rates surpass the red line representing the Federal Reserve’s 2% inflation target.
What I find most concerning is the clear acceleration in monthly price increases. The monthly annualised growth rates since April tell the story:
- May 2025: 1.8% p.a.
- June 2025: 3.7% p.a.
- July 2025: 3.0% p.a.
- August 2025: 4.9% p.a.
These numbers reveal what headline year-on-year figures obscure – inflation is not only increasing but accelerating at a troubling pace. This is the key insight that many commentators are missing.
Recent Inflation Data Confirms My Analysis
The latest inflation data further validates my concerns. The Consumer Price Index for August 2025 increased 0.4% on a seasonally adjusted basis, after rising 0.2% in July. Over the last 12 months, the all items index increased 2.9%, up from 2.7% in July. The core CPI (excluding food and energy) rose 0.3% in August and stands at 3.1% over the last 12 months.
The PCE price index, which is the Federal Reserve’s preferred inflation gauge, shows a similar trend. The July PCE price index increased 0.2% month-over-month and 2.6% year-over-year. More concerning is the core PCE price index, which rose to 2.9% on an annual basis in July, up from 2.8% in June. This is the highest level since February 2025 and significantly above the Fed’s 2% target.
Producer prices present a more mixed picture, with the PPI for final demand edging down 0.1% in August after advancing 0.7% in July.
However, on an unadjusted basis, the index for final demand rose 2.6% for the 12 months ended in August.
More importantly, the PPI for final demand less foods, energy, and trade services rose 0.3% in August, the fourth consecutive increase, and moved up 2.8% over the year – the largest 12-month advance since March 2025.
Services and Shelter: Not Offsetting Goods Inflation
A notable aspect of the current inflation picture is that while goods prices are facing upward pressure from tariffs, services and shelter inflation aren’t declining enough to offset this increase. Services inflation, which should be largely insulated from direct tariff effects, is showing persistent strength. In August, core services excluding shelter rose 0.3%, with transportation services particularly robust – airline fares increased 5.9% in August after a 4.0% gain in July.
Meanwhile, the shelter component, which had been moderating and helping to contain overall inflation, is no longer providing as much of a disinflationary offset. The shelter index rose 0.4% in August, the largest increase since January. Given that shelter accounts for about a third of the CPI basket, this shift is significant. The lack of sufficient offsetting declines in these major components means that as goods inflation accelerates due to tariffs, overall inflation will likely continue to rise.
Reading Between the Lines: The Concerning Details
Looking at the details reveals even more concerning trends. Grocery prices recorded their largest jump since August 2022, rising 0.6% in August. Core goods prices climbed at their fastest rate in seven months, with notable increases in vehicle and apparel prices. Core services prices also continued to firm, supported by higher travel-related expenses and a pickup in shelter costs.
While some analysts focus on headline year-over-year figures that still appear relatively contained, the momentum in monthly data paints a very different picture. The trajectory of inflation is clearly upward, and the rate of change is accelerating. This becomes evident when you analyze monthly growth rates rather than annual comparisons that can mask recent trends.
The Fed’s Credibility at Risk
Despite this clear inflationary trend, the Federal Reserve is expected to reduce its policy rate by 25 basis points in September. In my view, this would be a clear signal that the Fed has yielded to political pressure, contribting to undermining its credibility and creating an additional, independent inflation risk.
It’s worth noting that the Producer Price Index data for August showed an unexpected decline of 0.1%, which may give the Fed cover to proceed with rate cuts. However, the underlying details show that this decline was largely due to a 1.7% drop in trade services margins, which could indicate that businesses are temporarily absorbing higher costs from tariffs rather than passing them on to consumers. This is likely unsustainable, and we should expect to see more pass-through of these costs in the coming months.
The Inflation Trend That Emerges When You Examine All Six Price Indices
While individual price indices can sometimes send mixed signals, my analysis of all six major price measures (headline and core versions of CPI, PCE, and PPI) shows a consistent pattern of acceleration since April 2025. This comprehensive approach reduces the noise in any single measure and reveals the underlying inflation momentum.
The pattern becomes especially clear when examining the data in sequence. Each month since April has shown an acceleration from the previous trend, with August showing the most dramatic deviation yet.
The fact that this pattern holds across multiple indices strengthens the conclusion that we’re witnessing a genuine inflation acceleration rather than statistical noise.
Beyond Tariffs: A Fundamental Shift in Expectations
I believe we’re seeing something more concerning than just the direct effects of tariffs. The data suggests we’re witnessing a fundamental shift in inflation expectations, which presents the risk of a more permanent inflationary regime beyond the one-time impact of tariff adjustments.
What’s particularly concerning is that much of the tariff impact has yet to be fully realized. Many businesses have managed to soften the impact of rising costs by relying on pre-tariff inventories and accepting slimmer profit margins, as evidenced by the decline in trade services margins in the August PPI. However, these buffers are likely to continue to fade.
The fact that we’re already seeing accelerating inflation before the full effects of the tariff increases have worked their way through the economy suggests that the problem could become much worse in the coming months.
Conclusion: US Inflation’s Upward Trajectory Is Clearer Than Many Admit
While many commentators continue to express surprise at the lack of visible inflation from Trump’s policies, I maintain that the evidence is clear for those willing to look beyond headline figures and examine the actual trajectory of monthly data. I believe my analysis indicates that US inflation is not only rising but accelerating at a concerning pace.
The coming months will likely validate this assessment as the full effects of tariff increases work their way through the economy.
More troubling is the potential for entrenched inflation expectations, which could make this inflationary episode much more persistent than many currently anticipate.
Federal Reserve policymakers should take note of these warning signs before proceeding with interest rate cuts that could further fuel inflationary pressures. The window to prevent a more serious inflation problem may be closing quickly.
