MARKET UPDATE - Housing Vs. Tariffs: The Tug-Of-War Within The CPI

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MARKET UPDATE - Housing Vs. Tariffs: The Tug-Of-War Within The CPI

Two divergent forces are battling for control of the direction of the CPI right now: housing and tariffs.

Housing accounts for about 35% of the CPI basket by weight, and housing inflation continues to drop as an oversupplied residential sector puts downward pressure on rent rates.

Meanwhile, imported and import-using goods are now beginning to show an uptrend in pricing as a result of tariffs, and many domestically produced goods are similarly rising in price, using tariffs as cover. This is putting upward pressure on the CPI.

As of July, according to economists at Goldman Sachs (source), US importing businesses have absorbed about 2/3rds of the tariff costs, while consumers have absorbed 22% of it via price increases and exporters have absorbed 14% via lower export prices.

Goldman Sachs

However, as you can see above, the Goldman Sachs economists predict that by the final months of this year, 2/3rds of tariff costs will be absorbed by consumers via price hikes.

If they are right, then the CPI should experience a roughly 50 basis point bump between now and the end of 2025.

So far, there has been only a small uptick in CPI metrics, as headline CPI hit 2.7% in July while core CPI climbed to ~3.1%:

Data by YCharts

But the tariffs are reacting to a static or rangebound index of prices. Rather, they are coming during a period of significant and widespread disinflation (falling rate of price growth).

Here's a useful chart showing a breakdown of the contributors to the year-over-year CPI metric (as of June 2025):

JP Morgan - Guide to the Market

As you can see, by far the biggest contributor to a CPI rate over 2% for the last two years has been the shelter component. This is because, as we've explained in the past, the CPI's shelter inflation metrics lag real-time market rent rate changes by a year or more.

This lag virtually assures that the weighty shelter component of the CPI will continue disinflating for the foreseeable future.

This goes a long way toward offsetting the inflationary effects of tariffs, some of which are already showing up in the CPI numbers.

For example, in a previous market update, we identified the auto sector as one of the main areas where we expect to see tariff-induced inflation in the near future. Sure enough, auto repair and used vehicles were two of the biggest contributors to growth in the CPI in July:

Wall Street Journal

Meanwhile, smartphones saw a sharp drop in prices in July, perhaps as a result of discounting related to the glut of electronics that were imported in previous months to front-run the tariffs.

Indeed, economists from Harvard and the University of San Andres have been tracking the pricing impact of the tariffs in real time and publishing their findings every two weeks. By looking at pricing data from four large US retailers, they have found noticeable, albeit gradual, price increases that have been triggered by the imposition of tariffs.

Cavallo, Llamas, and Vazquez

Domestic goods have also risen in price, partly because many domestically produced goods use imported raw materials or intermediate parts and partly because domestic goods producers have used tariff protections as cover to raise prices.

The researchers zoom in on two categories of goods to illustrate particularly pronounced pricing effects:

• Furniture & household equipment (left chart below)

• Miscellaneous goods and services (right chart below)

Cavallo, Llamas, and Vazquez

In both cases, the initial imposition of tariffs definitively broke the prior disinflationary trends and began new uptrends.

These are illustrative cases of the kind of inflation we should expect to see in goods in the coming months as tariffs stabilize at their new, higher rates going forward.

Below, we dive into both the disinflationary and inflationary trends within the CPI to further illustrate this tug-of-war.

Disinflationary/Lowflationary Trends