Inflation accelerated in June as the impacts of tariffs began to seep into consumer prices, dimming the odds of an interest rate cut by the Federal Reserve later this month.
Consumer Price Index (CPI) data released Tuesday revealed that seasonally adjusted inflation rose 2.7% annually in June following a 2.3% reading in May, according to the U.S. Bureau of Labor Statistics (BLS).
Core inflation, which excludes the more volatile food and energy categories, clocked in at 2.9% for the 12-month period ending in June, a slight uptick from May’s 2.8% reading.
While headline inflation of 2.7% was in line with analysts’ predictions, economists polled by Dow Jones had expected a slightly higher 3% core inflation reading, according to CNBC.
On a month-over-month basis, the overall CPI increased 0.3% last month, with core inflation rising 0.2%. The household furnishings and operations index rose 1% month over month in June following a 0.3% increase in May. Recreation costs increased 0.4% last month, apparel prices rose 0.4% and personal care costs climbed 0.3%. Food prices increased 0.3% in June — the same mark as May — while energy costs rose 0.9% last month after falling 1% in June, driven by a 1% uptick in gasoline prices.
First American Senior Economist Sam Williamson noted in an analysis that the June inflation increase reflected both the impacts of the Trump administration’s tariff policies and growing shelter costs, which encompasses various housing-related expenses. Those costs are up 3.8% over the past year, according to BLS data.
“While shelter costs remained the primary driver of inflation, rising 0.2% month over month, the uptick in consumer prices signals that companies may be beginning to pass tariff-related costs on to consumers, a dynamic the Federal Reserve will monitor closely in the next few months.”
Williamson added that “while a September rate cut remains a possibility, today’s report likely reinforces the Fed’s cautious stance on rate moves.” The Fed is generally hesitant to cut interest rates during periods of rising inflation.
A team of Wells Fargo economists — led by Sarah House, Michael Pugliese and Nicole Cervi — also thinks a July rate cut is highly unlikely, though they expect the Fed to pull the trigger in September. Still, they noted it is “still early days when it comes to assessing the impact higher tariffs will have on consumer prices.”
“June’s CPI report was still only a month or two after the large tariff hikes that occurred in April/May,” the Wells Fargo economists wrote. “The pass through to consumer prices likely will not be immediate. Furthermore, President Trump has threatened further tariff increases on Aug. 1, and if those are realized, they will present additional upside risks to the inflation outlook in the months ahead.”
Interest-rate traders are now pricing in just a 3% chance of a Fed rate cut in July, according to the CME FedWatch tool. Those odds stood as high as 25% before a stronger-than-expected jobs report released July 3 shaved the probability down to 5%.
As of Tuesday morning, CME Group data showed that about 55% of futures traders think the Fed will cut rates in September.
