CPI and PPI Show Tariff Impact as Fed Weighs Rate Strategy

Weekly Economic Review: July 18, 2025

A flood of economic data was released in the week just ended, in contrast to the relative quiet of the prior week. New information was released on the Consumer Price Index, the Producer Price Index, and retail sales. New housing data was also released, including housing starts and building permit activity.

Key Summary:

Consumer prices rose in June as higher import costs resulting from new tariffs began to be passed on to consumers.

The week began with June’s Consumer Price Index (CPI), posting its strongest monthly rise in several months, led by increases in shelter, core goods, and energy. The annual inflation rate continued to climb, surpassing expectations and reaching its highest level since early in the year. Core inflation, which excludes food and energy, also rose, reflecting persistent underlying price pressures across a broad range of categories.

Food prices continued to rise steadily, with both grocery store items and dining out becoming more expensive. While some categories such as beverages and fresh produce saw notable increases, others like cereals, meats, and dairy experienced modest declines. Over the past year, food inflation remained elevated, with certain items – particularly eggs – registering significant price surges. Energy prices rebounded in June after an earlier decline, marking their strongest monthly increase in several months, though they remained lower than at the same time last year due to continued weakness in gasoline and fuel oil costs.

A key development in June was the broad-based increase in prices for tariff-sensitive goods, including furniture, apparel, appliances, toys, and sporting goods. These categories saw some of the sharpest monthly gains, suggesting that businesses are increasingly passing on higher import costs to consumers. While vehicle prices declined, the upward pressure in other core goods and services – especially those affected by trade policy – highlighted the ongoing impact of tariffs on consumer inflation.

Service prices, excluding energy, continued to rise in June, reflecting persistent inflationary pressure across key categories. Shelter costs remained a major contributor, though their pace of in-crease moderated slightly. At the same time, other service areas such as medical care, education, and recreation also saw steady gains, likely driven by higher labor and operational costs., Travel-related services like hotel stays and airline fares declined again, however, highlighting softer demand in those segments.

Wholesale prices moderated in June, driven mainly by a decline in service costs, mirroring trends in the June CPI report.

The Producer Price Index (PPI) was unchanged in June, which was below market expectations. This flat reading was primarily due to a decline in service prices, which offset modest price in-creases for goods. On a year-over-year basis, producer inflation continued to ease, marking the lowest annual increase in several months.

Goods prices rose modestly, driven largely by core goods such as communication equipment and residential electric power. Food and energy prices also increased, with energy rebounding after several months of declines. Consumer durable goods prices posted their strongest back-to-back increases in nearly three years, consistent with trends observed in the CPI report.

The services component saw a notable drag from a sharp decline in traveler accommodation services, which was the largest contributor to the overall decline in service prices. Additional price de-clines came from transportation, warehousing, and select retail and financial services. Some categories, however, including portfolio management and retailing of furniture and apparel, recorded price increases. Further, trade service margins for wholesalers and retailers held steady, indicating that manufacturers are exercising caution in passing along higher tariff-related costs to customers.

Core inflation measures, including the core PPI and the “super core” index – which excludes food, energy, and trade services – were also flat in June. Both came in below expectations and showed continued deceleration on a year-over-year basis.

Retail sales rebounded strongly in June, with broad-based gains across most categories, indicating resilient consumer spending.:

Retail sales showed a strong rebound in June, reversing declines from the previous two months and surpassing market expectations. This marked the highest monthly level since March, reflect-ing renewed consumer activity across a broad range of categories. On an annual basis, retail sales also posted solid growth, indicating continued resilience in consumer spending despite re-cent economic uncertainties.

Most retail categories gained, with notable strength in motor vehicles, miscellaneous stores, cloth-ing, and food services. These increases suggest a broad-based recovery in consumer demand, particularly in discretionary spending. However, a few categories, such as furniture and electron-ics, continued to decline, likely due to earlier purchases made in anticipation of price increases from tariffs. Gasoline sales remained flat after several months of declines.

Core retail metrics also outperformed expectations. Sales excluding autos and gasoline rose solidly, and the control group – used to estimate GDP – posted a healthy gain. These figures point to underlying strength in consumer spending, which remains a key driver of economic growth. The data suggests that despite pockets of weakness, overall retail momentum is improving heading in-to the second half of the year.

Housing construction rebounded above expectations due to a surge in multifamily activity, while single-family construction and permitting continued to decline.

New residential construction showed signs of recovery in June, with overall housing starts rising more than expected, driven by a strong rebound in multifamily projects. Single-family starts continued to decline, however, reflecting persistent affordability challenges and elevated inventory levels. Regionally, the Northeast saw a sharp increase in activity, while other regions experienced modest declines or remained flat. On a year-over-year basis, total housing starts were slightly lower, with single-family construction continuing its downward trend and multifamily starts maintain-ing steady growth.

Building permits, a forward-looking indicator, remained relatively stable overall, with a slight monthly increase. Single-family permits declined for the fourth straight month, reaching their lowest level in over a year, while multifamily permits rebounded after recent declines. Regionally, the South showed growth in permitting activity, while the Northeast and West saw declines. Compared to the previous year, total permits were down, driven by ongoing weakness in single-family authorizations, while multifamily permits continued to show annual gains, highlighting a shift in demand to-ward higher-density housing.

Additional details on the CPI, the PPI, retail sales and new residential construction follow.

CPI – June Update:

The Bureau of Labor Statistics (BLS) released June consumer price data, showing that the CPI rose 0.3% month-over-month, following a 0.1% increase in May. Although in line with expectations, this marked the largest monthly gain since January, and was, driven primarily by increases in shelter costs, core goods, and energy. On a year-over-year basis, consumer prices rose 2.7%, up from 2.4% in May, exceeding the market forecast of 2.6% and representing the highest annual increase since February.

Food prices also increased in June, rising by 0.3% month-over-month, matching the increase seen in May. Grocery store prices rose 0.3%, while prices for food away from home climbed 0.4%. Among grocery categories, nonalcoholic beverages and beverage materials rose 1.4%, fruits and vegetables increased 0.9%, and other food at home rose 0.2%. In contrast, prices for cereals and bakery products, meats, poultry, fish and eggs, and dairy and related products declined by 0.2%, 0.1%, and 0.3%, respectively. On an annual basis, food prices rose 3.0%, with grocery store prices up 2.4% and food away from home increasing 3.8%. Notably, prices for meat, poultry, fish, and eggs surged 5.8% year-over-year, with egg prices soaring 27.3%.

Energy prices rose 0.9% month-over-month in June, reversing a 1.0% decline in May and marking the largest gain since January. However, on an annual basis, energy prices decreased 0.8%, following a 3.5% decline in May. This decline was largely due to an 8.3% drop in gasoline prices and a 4.7% decrease in fuel oil.

Prices for goods, excluding food and energy commodities, increased 0.2% month-over-month in June, after remaining flat in May. This was the highest monthly increase since February. Categories that saw price increases included furnishings, apparel, medical care, recreation, education and communication, alcoholic beverages, and other goods. Meanwhile, transportation prices, particularly for new and used vehicles, declined. Prices for new vehicles fell 0.3% in both June and May, following no change in April, while used vehicle prices declined 0.7% in June, continuing a four-month downward trend.

Goods sensitive to tariffs also saw notable price increases in June. Furniture prices rose 1.0%, the largest increase since January. Apparel prices increased 0.4% after two consecutive monthly declines. Sporting goods prices accelerated 1.4%, appliance prices jumped 1.9%, and toy prices rose 1.8%.

Prices for services, excluding energy, increased 0.3% month-over-month in June, following a 0.2% gain in May. Shelter costs, which carry a 35% weight in the CPI, rose 0.2% after a 0.3% in-crease in both May and April. Two notable service categories saw continued declines: hotel and motel prices fell 3.6% in June, marking the fourth consecutive monthly decline, while airline fares dropped 0.1%, extending a five-month streak of decreases.

Excluding food and energy, the core CPI rose 0.2% in June, up from 0.1% in May but below the expected 0.3% increase. On an annual and unadjusted basis, the core CPI rose 2.9%, up from 2.8% in May and the highest since February. The June figure came in as expected.

CPPI – June Update:
The Bureau of Labor Statistics (BLS) reported that the Producer Price Index (PPI) was flat in June on a month-over-month basis, following a revised 0.3% increase in May (originally reported as 0.1%). The June reading came in below market expectations of a 0.2% rise, primarily due to a 0.1% decline in service prices. On an annual basis, the PPI rose 2.3% in June, down from a revised 2.7% in May (initially 2.6%) and below the consensus estimate of 2.5%. This marks the low-est year-over-year increase since September.

Goods prices rose 0.3% in June, accelerating from a 0.1% gain in May. More than half of the June increase was driven by core goods (excluding food and energy), which also rose 0.3%. Similar to the Consumer Price Index (CPI) report, both food and energy prices posted increases. Food prices edged up 0.2% after being flat in May and falling 0.9% in April. Energy prices rebounded by 0.6% in June, ending a four-month streak of declines. Consumer durable goods prices rose 0.4% in June, following a 0.5% increase in May – the strongest back-to-back price hikes in nearly three years.

Service prices declined 0.1% in June, reversing a 0.4% increase in May. The drop was mainly driven by a 0.1% decrease in services excluding trade, transportation, and warehousing, along with a 0.9% decline in transportation and warehousing services. Trade service margins for wholesalers and retailers were unchanged after a 1.1% increase in May, suggesting manufacturers re-main cautious in passing on higher tariff-related costs. Over half of the overall service price decline in June was attributed to a 4.1% decline in traveler accommodation services. Prices also fell for automobile and parts retailing, deposit services, airline passenger services, and food and alcohol wholesaling. In contrast, prices rose for portfolio management; machinery, equipment, parts, and supplies wholesaling; furniture retailing; and apparel, jewelry, footwear, and accessories retailing.

Excluding food and energy, the core PPI was unchanged in June, following a revised 0.4% in-crease in May (initially 0.1%). This was below the market forecast of a 0.2% gain. On a year-over-year basis, the core PPI rose 2.6% in June, slightly below expectations of 2.7% and down from a revised 3.2% in May (initially 3.0%), marking the lowest level since July.

The “super core” PPI – which excludes food, energy, and trade services and is considered a less volatile measure – was also unchanged in June, falling short of the expected 0.2% increase and following a 0.1% gain in May. On an annual basis, the super core PPI rose 2.5% in June, down from a revised 2.8% in May (initially 2.7%), the lowest level since late 2023.

Retail Sales – June Update:
According to the U.S. Census Bureau, retail sales rose 0.6% month-over-month in June, rebound-ing from a 0.9% decline in May and a 0.1% dip in April. This marks the highest monthly level since March and significantly outpaced market expectations of a 0.1% increase. On a year-over-year basis, retail sales climbed 3.9% in June, following a 3.3% gain in May.

Of the 13 categories tracked, 10 posted gains in June. Notably, motor vehicle and parts sales rose 1.2%, reversing two consecutive monthly declines. Miscellaneous store sales increased 1.8%, building on a 3.6% gain in May. Clothing and accessories, as well as building materials and garden equipment, each rose 0.9%. Sales at food services and drinking places—a key indicator of house-hold financial health and the only services component in the report—rose 0.6% after a 0.1% de-cline in May. Other categories showing growth included food and beverage stores, health and personal care, sporting goods, hobbies, books and music, general merchandise, and non-store retailers.

Conversely, two categories saw continued weakness. Furniture and home furnishings declined 0.1% in June, following a 0.6% drop in May, while electronics and appliance sales also fell 0.1%, after a 0.3% decline the previous month. Both categories posted gains earlier in the year, likely due to preemptive purchases ahead of anticipated tariff-related price increases. Meanwhile, gasoline station sales were flat in June after four consecutive monthly declines.

Excluding autos and gasoline, retail sales rose 0.6% in June, following a revised flat reading in May (previously reported as a 0.1% decline), and were up 4.1% year-over-year – well above the expected 0.3% gain. Control group sales – which exclude food services, autos, building materials, and gasoline stations and are used to calculate GDP – rose 0.5%, beating the 0.3% forecast and improving from a revised 0.2% gain in May. On an annual basis, control group sales increased 4.0%.

New Residential Construction – June Update:

1. Housing Starts:
According to the U.S. Census Bureau and the Department of Housing and Urban Development, new residential construction rose by 4.6% month-over-month in June, reaching a seasonally adjusted annual rate of 1.32 million units, up from 1.26 million units in May (revised from a -9.8% to a -9.7% decline). This rebound exceeded market expectations, which had anticipated a 3.5% in-crease.
• Single-family housing starts declined by 4.6% to an annualized rate of 883K units, following a 2.3% decline in May. The drop is attributed to elevated home prices and a 17-year high in new home inventory.
• Multifamily starts surged by 30.0% to 438K units, rebounding from a 25.1% decline in May. This figure is well above the long-term average of 367K units (1959–2024).

Regional Breakdown:
• Northeast: 73.3%
• Midwest: -5.3%
• South: -0.7%
• West: -1.4% to 286K units, including:
o Single-family: 195K units (+0.5%)
o Multifamily: 91K units (-5.2%)

Annual Comparison:
Total housing starts were down 0.5% in June, marking the second consecutive annual decline.
• Single-family starts: -10.0% (sixth consecutive annual decline)
• Multifamily starts: +26.6% (fourth consecutive annual increase)

2. Building Permits:
Building permits edged up 0.2% month-over-month in June to a seasonally adjusted annual rate of 1.397 million units, slightly above May’s 1.394 million and ahead of market expectations of 1.387 million.
• Single-family permits fell by 3.7% to 866K units, marking the fourth consecutive monthly decline and the lowest level since March 2023.
• Multifamily permits rose by 7.3% to 531K units, rebounding from two straight months of de-clines.

Regional Breakdown:
• Northeast: -11.4%
• Midwest: 0.0%
• South: 4.4%
• West: -5.1% to 296K units, including:
o Single-family: 175K units (-6.9%)
o Multifamily: 121K units (-2.4%)

Annual Comparison:
Total building permits declined 4.4% in June, marking the third consecutive annual decline.
• Single-family permits: -8.4% (thirteenth consecutive annual decline and lowest since May 2023)
• Multifamily permits: +2.9% (fourth consecutive annual increase)

Conclusion:
There is something for everyone in last week’s data releases. Inflation hawks will note that inflation at the consumer level remains above the Fed’s 2% target, and that consumer spending remains strong, both of which argue in favor of maintaining interest rates at or near their current levels. Those advocating for interest rate reductions will point out that inflation remains moderate with no signs of a tariff-related inflation surge, but that the slowdown in single family home construction and demand could portend a future decline in overall economic activity. On balance, we expect the Fed to stay with its current interest rate posture.

Market Analysis:
The S&P 500 and Nasdaq closed last week at record highs, while the Dow Jones Industrial Aver-age posted a modest weekly decline. Overall, equity markets were buoyed by strong corporate earnings and resilient economic indicators.

Treasury yields were largely unchanged this week. The two-year and five-year yields each declined slightly, while the ten-year yield edged up. Specifically, the two-year closed at 3.88%, the five-year at 3.96%, and the ten-year at 4.44% – representing changes of -2, -3, and +1 basis points, respectively, from the previous week.

Markets are currently pricing in two quarter-point rate cuts in 2025, totaling a 0.50% reduction. The first cut is anticipated at the October FOMC meeting, followed by another in December, which carries an 83% probability. If the December cut does not materialize, markets are assigning a 100% probability to a second cut in January 2026. Looking further ahead, two additional cuts are expected by July 2026, with one more projected in December 2026, currently priced in with an 80% probability.

Next Week’s Economic Calendar:
Next week’s economic calendar is relatively light. On Wednesday, the June existing home sales report will be released, with a projected decline of 0.7% to 4.00 million units. On Thursday, the new June home sales report is expected to show an increase of 4.3% to 650,000 units. On Friday, the June durable goods orders report will be announced, with expectations pointing to a sharp decline of 10.3%, suggesting a potential weakness in business investment and manufacturing demand.

Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

Thomas McCullough
EVP of Commercial Bank of California

_______________________________________________________________________

All content available on this material is general in nature, not directed or tailored to any particular person, and is for informational purposes only. Any of its content is not offered as investment advice and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. The information contained herein reflects the opinions and projections of Commercial Bank of California (CBC) as of the date hereof, which are subject to change without notice at any time. CBC does not represent that any opinion or projection will be realized. The information contained herein has been obtained from sources considered reliable, but neither CBC nor any of its advisors, officers, directors, or affiliates represents that the information presented on this material is accurate, current, or complete, and such information is subject to change without notice.