Macroeconomic Overview: The conflict around Iran has had effects on a range of prices. Recent readings on inflation in the U.S. have pulled further above the Federal Reserve’s target of two percent. Fed officials emphasize a “core” price deflator (Personal Consumption Expenditures or PCE index) that excludes energy and food (value was +3.3% in April). The overall CPI, including all goods and services, was +4.2% in May.
The Federal Reserve has a dual mandate, and inflation is half of its mission. The other focus is employment. With the unemployment rate holding at low levels and with job gains rising, Fed policy may orient itself towards the inflation side of its concerns. Expectations were that interest rates could have been cut by the incoming central bank chair over the next few months, but those expectations have been pared back as hiring improved and inflation surged.
Retail prices for clothing have risen sharply in recent months. Since January, the CPI for garments increased more than three percent. The cause of the recent increase are unclear, particularly since clothing prices were relatively stable throughout 2025 despite the changes in tariff rates.
Tariff rates may be adjusted again in coming months. After the Supreme Court revoked International Emergency Economic Power Act (IEEPA), new tariffs were put into effect under legal standing from Section 122 (10-percentage-point increases over base rates for nearly all countries). Those Section 122 tariffs have a time limit and will expire July 24th.
A potential replacement for Section 122 tariffs are duties justified under Section 301. Section 301 tariffs require an investigation uncovering findings of unfair trade practices. Investigations into forced labor and excess capacity were launched in March. Findings involving forced labor were released June 2nd.
In a Federal Register summary of the findings, there were statements allowing carveouts for textiles made with U.S. materials, including cotton. Details concerning these exemptions and how to obtain them are currently unknown.
Employment: The U.S. economy is estimated to have added +172,000 jobs in May. This was the third consecutive monthly gain over 150,000 jobs (+214,000 in March, +179,000 in April). Prior to the past three months, there were -156,000 jobs lost in February and the average job growth in the previous twelve months was only +11,000 (March 2025 to February 2026). Revisions to existing estimates were positive, with the figure for March increasing (+29,000 to +214,000) and the figure for April increasing (+64,000 to +179,000). The current twelve-month average for job gains is now +41,000.
The unemployment rate was unchanged for the second consecutive month at 4.3%. It has been between 4.0% and 4.5% since the middle of 2024. Levels below five percent are low by historical standards. Wage growth decelerated month-over-month in May (from 3.6% to +3.4%). With the deceleration in wages and the rise in inflation, the rate of income growth slipped below the rate of price increases for the first time since May 2023 (May reading for the overall CPI was +4.2%).
Consumer Confidence & Spending: The Conference Board’s Index of Consumer Confidence® was nearly unchanged month-over-month in March (-0.7 points to 93.1). It has been holding near this level since the first quarter of 2025. Throughout this period, overall consumer spending growth decelerated slightly, while spending on clothing has been strong.
Consumer spending growth slowed in April, from +0.3% to +0.1% month-over-month. Year-over-year overall spending was +2.1%. Spending on apparel contracted month-over-month for a second time in a row in April (-0.1% in March, -0.8% in April). Nonetheless, year-over-year spending on clothing continues to outpace overall expenditures. Apparel spending was up +3.5% year-over-year in April (+2.1% for overall spending). The annual increases in apparel have been compounding the strong gains made one year ago, when spending on clothing was growing at rates over six percent year-over-year.
Consumer Prices & Import Data: The month-over-month decreases in spending on garments were accompanied by increases in retail apparel prices. The CPI for garments rose by more than one percentage point in February (+1.8%) and March (+1.1%), marking the sharpest monthly gains in consumer prices for clothing since the pandemic. Current values for the CPI for clothing are the highest since 1998. However, the general trend since the late 1990s has been for flat to lower prices, and the latest reading (May 2026) is about six percentage points higher than it was in 2014 (128.7 in May 2026, average in 2014 was 121.1).
The average cost per square meter equivalent (SME) of cotton-dominant apparel was $3.67/SME in April (latest available data), which is down -0.5% year-over-year but also +9.3% higher than the three-year average before the onset of COVID. This value also excludes tariffs, which are currently ten percentage points higher than they were before 2025 for imports from most trade partners.