The next two weeks will provide the first real insight into the impact of tariffs on inflation.
Demand-side factors that started during the pandemic are still driving inflation, which strongly implies that the Federal Reserve still has work to do to return the top-line personal consumption expenditures index, the Fed’s preferred measure of inflation, back to 2%.
On the supply side, the central bank and investors are girding for tariff-induced disruptions when data is released for June and over the next several months.
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On Tuesday, the consumer price index, which the public follows closely, will be released for June. We expect a top-line monthly rate of 0.3% and 0.2% on the core, which will translate to 2.6% year-over-year increase and 2.9% on the core.
Given recent threats of higher tariffs on specific countries and sectoral trade, it is getting harder to take arguments that the current trade war will not result in rising inflation in both the top-line and core metrics.
With both year-over-year categories rising on the back of demand-driven inflation and supply-side factors likely to drive further increases, the Fed will continue to be patient on cutting rates. We do not expect a rate cut until the December policy meeting.
