Tariff-spawned price increases aren't over
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Illustration: Brendan Lynch/Axios
Just a few weeks ago, there were plenty of reasons to expect inflation pressures to fade in the back half of 2026. The latest evidence makes that seem a little less sure.
Why it matters: These are new cracks in the disinflationary narrative, which raises doubts about the Federal Reserve's ability to forestall interest rate increases.
- Price pressures are not looking as severe as they did in the spring, when the Strait of Hormuz was blocked and oil prices were at a multiyear high. But there is reason to question whether a glide path back to 2% inflation is on track.
- The Iran conflict is flaring up again, as are energy prices. There is new evidence that companies are not finished passing tariff costs through to prices. And the AI buildout and resulting inflationary pressures are becoming all the more apparent.
State of play: The price of Brent crude oil, the international benchmark, was below $72 a barrel last week, before rebounding to $78 on Wednesday after President Trump lambasted Iranian leadership and said the ceasefire was over.
- That's still well below the $100+ levels seen for much of March through May. But the latest developments are a reminder that Middle East oil flows remain volatile at a time when global inventories have already been stretched by the conflict.
Zoom in: A second reason for optimism on the inflation front has been forecasts that businesses are largely done adjusting their prices to reflect the higher tariffs implemented last year. On that front, too, the news hasn't been great in the last couple of weeks.
- The Trump administration declined to extend the U.S.-Mexico-Canada trade pact, creating a new layer of uncertainty around future North American tariffs.
- And the president has threatened new trade barriers with Spain, suggesting that no trade peace will be permanent.
Of note: A new paper from the New York Fed finds that 47% of service firms and 44% of manufacturers that directly paid tariffs planned further price increases as a result.
- "These results suggest that many businesses are still adjusting their prices, more than a year after tariffs were first introduced," five New York Fed economists wrote, based on a regional survey. "What is clear is that the adjustment has been gradual," they add, "building over the better part of a year rather than all at once."
- While there is broad consensus among Fed officials that tariff-driven price increases should be viewed as a one-time adjustment rather than an ongoing source of inflationary pressure, the results imply that there could still be more tariff-driven inflation in the works.
Zoom out: It is all occurring amid growing evidence that the AI buildout is fueling near-term inflationary pressures, with elevated demand for computer chips, building equipment, and construction labor pushing up certain prices.
- Minutes of the June Fed policy meeting released Wednesday afternoon, for example, indicated that the staff inflation forecast was higher than in April, reflecting the Middle East war "and the effects of the AI buildout on consumer prices."
Reality check: The near-term outlook for inflation isn't radically different than it was a week ago, with the five-year Treasury breakeven rate — the annual inflation implied by bond prices — up only to 2.31%, from 2.21% a week ago.
The bottom line: Still, predictions that inflationary pressures will recede rapidly over the remainder of the year come with increasingly obvious asterisks.
