Fin-X Pulse - Tariffs begin to appear in US CPI
- Brett Careedy
- Jul 16
- 4 min read
US CPI showed signs of tariff pass-through and estimates of the timing of a Fed cut have been pushed back slightly. However, there is a bigger story brewing in longer-dated yields that suggests that the bond market is beginning to price a more dovish Fed from next year.
US headline CPI rose by +0.3% in June on a seasonally-adjusted basis, in line with expectations.
Shelter (+0.2%) "was the primary factor in the all items monthly increase," according to the BLS. The energy index also rose +0.9% in June as the gasoline index increased +1.0% percent over the month, although the non-seasonallly-adjusted change was just +0.1%).
The indexes for discretionary items such as used cars and trucks (-0.7%), new vehicles (-0.3%), and airline fares (-0.1%) were among the major indexes that decreased in June.
The annual increase of +2.7% was up from +2.4% in May and slightly above forecasts of +2.6%. It was the highest annual change since February.
The energy index decreased by -0.8% for the 12 months ending June, a significant change from the -3.5% annual decrease in May due to a combination of base effects and the June increase. Shelter prices are up +3.8% yoy, compared to +3.9% yoy last month.
Core CPI ex-food and energy increased by +0.2%, up from +0.1% in May but below the expected +0.3% increase.
The annual increase in core CPI was, however, in line with expectations at +2.9%, up from +2.8% last month, and also the highest annual change since February this year.
The Fed's "supercore" measure of services less housing increased by +0.2%, with the annual rise of +3.0%. This was the highest reading since February as well.
S&P500 6,244 -0.4%, Nasdaq Comp. 20,688 +0.2%, S&P/ASX200 8,545 -1.0%,
US 2yr 3.95% +6bps, US 10yr 4.49% +6bps, US 20yr 5.03% +5bps
US dollar (DXY) index 98.58 +0.5%, AUDUSD 0.6517 -0.4%, Gold US$/oz 3,330 -0.4%
Fin-X Wealth View
The June CPI report suggested that firms are passing through tariff increases to consumers. Prices paid have been elevated in recent business surveys, and this was apparent again in the Empire (NY) manufacturing survey overnight.
However, there is more evidence that consumers have limited capacity to absorb the price increases. Discretionary categories saw weaker inflationary pressure than non-discretionary. Moreover, the deceleration in real average weekly earnings from +1.5% yoy in May (revised to +1.4%) to +0.7% yoy in June suggests that consumers are seeing subdued wage growth again after a reasonable pick-up in 2024 as inflation declined. Real wages are up by an annualised rate of just +0.5% since December 2019, compared to an annualised average of +0.8% between 2009 and 2019.
Nevertheless, despite the CPI figures being broadly in line with expectations, the market has reacted to the data by pushing back the estimated timing of Fed cuts. The market now sees only a 54% chance of a September cut, with a -0.25% reduction by the end of October being fully priced.
However, that is arguably not the most significant inflation story at the moment. Yes, the market is seeing shorter-term measures of breakeven inflation rise, but not as high as the end of 2024. In contrast, longer-term measures of breakevens are starting to push back up to the higher levels of the post-pandemic ranges. There is also upward pressure in longer-dated yields. This indicates that the bond market is listening to the administration's calls for lower rates and preparing for a more dovish Federal Reserve Chair that has a higher tolerance for inflation risks at the end of Jerome Powell's term in a year's time. Even so, this is only priced as a potential risk so far, and breakevens could still rise, making inflation-protected Treasuries relatively more attractive than straight bonds.
There is also renewed investor interest in commodities and real assets, while bitcoin now trades around US$120,000. The US dollar index has risen recently as Fed cuts have been pushed back, but it is still down -9.1% in 2025 and seems likely to resume the downtrend.
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