With all the talk of U.S. tariffs, you might expect the inflation rate in our southern neighbour to be through the roof, but this is not the case. At least not yet.

Numbers released this morning by the U.S. Bureau of Labor Statistics show that the headline inflation rate was unchanged in July at 2.7%—higher than both consumers and the U.S. Federal Reserve would like, but not rising precipitously.

Lower gasoline prices, which were down by 9.5% compared to July 2024, helped contain overall price growth.

The impact of U.S. tariffs was more evident in the core reading. Excluding the volatile food and energy categories, the core inflation rate was 3.1%, up from 2.9% in June and 1.1 percentage points above the Federal Reserve’s 2% target.

The real test, however, is yet to come with many of the threatened tariffs not actually in force in July, pre-tariff inventory still being used up, and some businesses absorbing the tariff costs rather than passing them on—a practice that may not be viable over the long-term.

As such, it’s the forthcoming inflation reports that will tell the true story regarding the inflation effects of tariffs on U.S. consumers.

In the meantime, some are arguing that the fact U.S. headline inflation held steady in July will tip the U.S. Federal Reserve toward an interest rate cut at its next meeting in September. Others, however, are pointing to the rise in core inflation and the still-to-come impact of tariffs as reasons the Fed may stay on pause. Our call is that the Fed will cross its fingers on inflation and cut in September to give the U.S. labour market and overall economy a boost.

Why this matters to us here in Canada is two-fold.

First, rising U.S. inflation would put more pressure on Trump to moderate his stance on tariffs, including those on Canada (though whether or not this would actually change his mind is anyone’s guess).

Second, what the Fed decides to do affects financial markets, the exchange rate and U.S. economic growth—all of which reverberate across the Canadian economy.

Answer to the previous trivia question: “The dog days of summer” is linked to the ancient Egyptians who used the appearance of Sirius (the Dog Star) to indicate that the summer flooding of the Nile was about to begin.

Today’s trivia question: What architectural tourist attraction gets bigger during hot summers?