On July 15, Reuters reported that U.S. consumer prices likely experienced a notable uptick in June, signaling the potential onset of a long-anticipated inflation increase driven by tariffs. This development has caused caution among Federal Reserve officials regarding any immediate interest rate cuts. The upcoming Consumer Price Index (CPI) report from the Labor Department, scheduled for release on Tuesday, is expected to reveal a rebound in gasoline prices, along with higher costs for several goods sensitive to tariff changes.
Consumer inflation readings from February through May had shown relatively soft trends, prompting calls from President Donald Trump for the U.S. central bank to lower borrowing costs. Recent business surveys indicate that inflation is poised to rise this summer, especially following Trump’s announcement last week of higher tariffs set to take effect on August 1. These tariffs will impact imports from countries including Mexico, Japan, Canada, Brazil, and the European Union.
According to Sarah House, a senior economist at Wells Fargo, the June CPI report is likely to reflect a resurgence in inflation, although not substantial enough to alarm Federal Reserve officials at this stage. As businesses deplete their pre-tariff stockpiles, they may find it increasingly challenging to absorb higher import duties without raising consumer prices. Economists surveyed by Reuters predict that the CPI increased by 0.3% in June following a slight rise of 0.1% in May, marking the most significant gain since January.
Gasoline prices are anticipated to rebound after four consecutive monthly declines, contributing to the expected inflation increase. Additionally, mild food price increases are forecasted due to a reduction in egg prices, which have previously been affected by an avian flu outbreak. Over the year leading up to June, the CPI is projected to rise by 2.7%, an increase from the 2.4% recorded in May.
Excluding the more volatile food and energy sectors, the core CPI is estimated to have risen by 0.3% in June, matching May's rise but representing the largest advance since January. This increase is likely driven by various items impacted by tariffs, including furniture and recreation goods. Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets, noted that anecdotal evidence suggests that tariff-related price hikes are becoming more frequent, although he expects the majority of the impact to manifest in July and August.
While solid price increases for goods are anticipated, they may be somewhat counterbalanced by moderate rises in service costs. Current soft demand has restricted price increases in service-related categories, such as airfares and hotel accommodations. For the 12 months ending in June, core CPI inflation is estimated to have increased by 3.0%, a rise from the 2.8% recorded for three consecutive months.
The Federal Reserve monitors various inflation measures to maintain its 2% target. The central bank is expected to keep its benchmark overnight interest rate within the 4.25%-4.50% range following the upcoming policy meeting later this month. Minutes from the Fed's June 17-18 meeting, released last week, indicated that only a few officials felt rates could potentially fall as early as the July 29-30 meeting.
Even if there is a slight increase in overall core CPI due to rising goods prices, Veronica Clark, an economist at Citigroup, suggests that the modest inflation in services may alleviate concerns over widespread inflationary pressures. This perspective may allow Federal Reserve officials to feel comfortable about lowering rates in September, despite any stronger inflation data that may emerge in the coming months.
Goldman Sachs forecasts monthly core CPI inflation increases of between 0.3% and 0.4% in the near term, largely driven by tariff-related hikes in the prices of consumer electronics, automobiles, and apparel. The investment bank anticipates minimal immediate impact on core services inflation.
Reporting by Lucia Mutikani; Editing by Paul Simao.
