This week’s release of the Consumer Price Index (CPI) for June rocked economic projections. Shortage-driven inflation is what we’re experiencing and demand-driven inflation is now starting to rear its ugly head. The core CPI for June came in at a 0.228% month-over-month increase, a miss from the projected 0.3%. This underwhelming number, the lowest in two years, has already generated speculation about what the Federal Reserve might do differently with monetary policy in the coming months.
We know that the economic landscape is undergoing swift and fundamental changes. Accordingly, the probability of the Federal Reserve cutting rates in September has decreased from 65.8% to 52.6%, according to data from the CME FedWatch tool. Just last month, economists were announcing that inflation in the United States had reached 2.7%. This increase comes on the heels of the tariffs enacted in former President Donald Trump’s administration. The Financial Times reported, “US inflation reaches 2.7% as Trump tariffs hit,” highlighting the growing concern among analysts regarding the impact of these tariffs on consumer prices.
In a reflection of these challenges, Reuters characterized the June CPI increase as a sign that “Fed’s inflation fears start to be realized.” Given these economic conditions, it’s not unreasonable for inflation to land between 4% and 4.5% by end of year. In response, economists across the board are behind on making their predictions.
With Inflation Insights comes the revelation of an enormous whammy. In June, core goods prices—excluding automobiles—jumped 0.55%, the biggest one-month increase since November 2021. This is the first sign that tariffs are starting to seriously affect the prices consumers pay. Today’s report proved that tariffs are beginning to make a tangible difference,” Laura J. That’s a clear demonstration of the harmful impact these trade policy choices are making on inflation.
Beyond these changes, analysts are expecting a 0.2% month-over-month increase to the Producer Price Index (PPI). They are projecting a huge increase of 2.5% YOY. The core PPI, which excludes food and energy prices, is forecast to decline to 2.7%. That’s down from the inflationary baseline of 3.0%. The back-and-forth nature of these metrics indicates the intricate relationship between persistent inflationary pressures and the strategies being employed by the Federal Reserve to counteract them.
As we explore in more detail below, housing costs have been one of the most important contributors to inflation’s surge in recent years. On net, though, the most recent data suggest that the tide may be turning toward disinflationary pressure in this sector. The Cleveland Fed’s newly introduced tenant rents series hints at a cooling trend in housing costs, which may alleviate some inflation concerns moving forward.
Trump as of late has been lobbying for a 3% cut in the discount interest rate. This demand only complicates the Federal Reserve’s task, already a monumental challenge, as they face soaring inflation. Those immediate expectations for a rate cut began to recede. This change came shortly after the CPI rose and started showing that the impact of tariffs were starting to affect prices.
Market reaction has made evident these uncertainties. The 30-year yield even briefly exceeded 5% due to inflation concerns, but ultimately settled back down below that threshold. The mixed signals from economic indicators and evolving inflation forecasts leave policymakers and market participants grappling with how best to navigate this shifting landscape.