Has U.S. Inflation Started Turning Higher Again?

Why It Matters

The shift from cost absorption to price passing signals renewed inflationary pressure, potentially delaying Federal Reserve rate cuts and affecting market valuations.

Key Takeaways

• Tariff rate jumped to 13% in 2025.
• Headline inflation eased to 2.7% YoY.
• Firms began passing tariff costs to consumers.
• Core PCE rose 0.4% month‑over‑month.
• Fed may postpone cuts if inflation stays high.

Pulse Analysis

The Federal Reserve Bank of New York reported an unprecedented rise in the average tariff rate on U.S. imports, climbing from 2.6% to 13% over 2025. While higher tariffs typically feed through to consumer prices, many U.S. firms chose to protect market share by absorbing the added cost, sacrificing margins rather than raising prices. This strategy helped keep headline inflation low through 2025, despite the sharp tariff increase, and underscored the delicate balance between trade policy and domestic price stability.

December’s personal consumption expenditures (PCE) report, however, revealed a notable reversal. Core PCE rose 0.4% month‑over‑month and 3% year‑over‑year, driven largely by core goods excluding food and energy. Inflation expectations have nudged upward, with one‑year forecasts at 3.1% and longer‑term expectations steady at 3%. The data suggests firms are now more willing to pass tariff‑related costs to consumers, reviving inflationary pressure and prompting the Federal Reserve to consider a more measured approach to future rate cuts, which could weigh on equities and risk assets.

The legal backdrop adds another layer of complexity. A recent Supreme Court decision invalidated tariffs imposed under the International Emergency Economic Powers Act, but the ruling left the majority of tariffs—covering steel, aluminum, copper, automobiles, and more—intact. Moreover, the administration swiftly introduced a new 15% duty under the Trade Act of 1974 and retains multiple statutory tools (Sections 201, 301, 332, 232) to impose further measures. For investors, this evolving tariff landscape means heightened volatility, potential opportunities in tactical arbitrage trades, and a need to monitor Fed policy cues closely as inflation dynamics evolve.