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The key points
In June, US headline CPI inflation rose at an annual rate of 2.7 per cent, slightly above market expectations
Core CPI at 2.9 per cent was in line with expectations, but signs of tariff-driven inflation continue to build in key categories, suggesting that broader price rises are in the pipeline in the months ahead
The verdict
US headline and core CPI inflation were well-behaved in June, coming in roughly in line with expectations. But rather than the aggregated figures, we think the focus of rate-setters at the Federal Reserve will be on inflation dynamics in import-heavy goods categories.
With sharp jumps registered in monthly prices for goods such as furnishings and toys, the data supports the thesis that tariff price pressures are building within the US economy and, at the margin, bolsters the case for an extended interest rate hold.
The details
The headline rate of US CPI rose 2.7 per cent in June, according to data released on Tuesday, slightly above market expectations of a 2.6 per cent rise and above May’s 2.4 per cent rise.
Core CPI, which excludes volatile food and energy prices, rose at an annual rate of 2.9 per cent, in line with expectations and a touch above the previous month’s 2.8 per cent rise. On a monthly basis, core inflation rose 0.2 per cent, slightly lower than forecasts of a 0.3 per cent increase.
Tuesday’s release had been hotly anticipated as markets have been on the lookout for signs that President Donald Trump’s tariffs are generating new price pressures within the US economy.
Despite the headline and core CPI inflation numbers falling roughly in line with expectations, there were ample signs in the data that tariff inflation is indeed building beneath the bonnet, reflecting the large effective tariff on goods from China.
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Household furnishings prices rose at a monthly rate of 1 per cent, substantially above the previous month’s 0.3 per cent rise and the strongest increase since January 2022. Toy prices also registered strong monthly increases, rising at a monthly rate of 1.8 per cent, a second consecutive month of sharp growth after May’s 1.3 per cent rise and the biggest increase since April 2021. Smartphone prices were flat on the month, having declined in previous months.
In recent weeks, members of the Federal Open Market Committee have given conflicting assessments of the underlying trajectory of US economic activity and inflation.
Two Trump-appointed FOMC members, Christopher Waller and Michelle Bowman, have expressed support for a July rate cut. While the two are firmly in the minority, some rate-setters have indicated openness to reducing rates later this year, while others would still prefer to hold rates in the face of elevated tariff uncertainty.
Tuesday’s CPI inflation release is a relative victory for the hawks, since it supports the thesis that tariffs are causing prices to accelerate in a broadening range of import-exposed goods. While their impact on the all-items CPI figures is still contained, we think the majority of the FOMC will see reason for caution in this release, raising the bar for a near-term cut.
With high confidence, we continue to expect the Fed to hold the benchmark rate at its upcoming meeting in late July. While the September meeting is live and the FOMC could cut if tariff price pressures remain confined to a few categories, our base case remains that the Fed will hold the benchmark rate at the current level of 4.25 to 4.5 per cent for the rest of the year.
In charts
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