CPI Inflation Report: Tariff Inflation is Just Beginning

Summary

President Trump is pushing for immediate interest rate cuts despite rising inflation, with CPI inflation increasing from 2.4% in May to 2.7% in June. The debate centers around whether tariffs are contributing to inflation, with differing views on their impact. The bond market's reaction to Treasury yields could influence Trump's decision on tariffs, which may be postponed again. Meanwhile, the Federal Reserve's next meeting could provide more clarity on potential rate cuts, but with inflation rates still high, the chances of a rate cut in July or September remain uncertain. Trump's impatience with the Fed contrasts with their cautious approach based on economic data.

Takeaways

• 😀 Inflation has increased from 2.4% in May to 2.7% in June, signaling a notable rise in prices.
• 😀 Core CPI inflation also rose from 2.8% in May to 2.9% in June, showing broader inflationary pressures.
• 😀 There is ongoing debate about whether tariffs are causing inflation, with some arguing tariffs are not inflationary due to limited consumer spending power.
• 😀 Others argue tariffs contribute to inflation by raising prices as importers pass on costs to consumers.
• 😀 The inflationary impact of tariffs is starting to show, especially in the goods sector, such as apparel and furniture.
• 😀 Other factors, like shelter and food prices, are also driving inflation, not just tariffs.
• 😀 Tariffs are expected to continue to add inflationary pressure for several months, and the largest tariffs have yet to be implemented.
• 😀 President Trump has shifted from claiming there's no inflation to acknowledging 'very low inflation' and demanding an immediate 3% interest rate cut.
• 😀 The bond market is showing concern, with the 30-year Treasury yield surpassing 5%, which could influence the timing and implementation of tariffs.
• 😀 Before the inflation report, there was a 95.3% chance the Federal Reserve would not cut interest rates in July, which increased to 97.4% after the report.
• 😀 The probability of a rate cut in the September Federal Reserve meeting decreased slightly, but remains a near coin toss, dependent on upcoming data.

Q & A

What was the key finding in the latest CPI inflation report?

The CPI inflation rate rose from 2.4% in May to 2.7% in June, and core CPI inflation accelerated from 2.8% to 2.9%.

What factors are contributing to the rise in inflation?

The rise in inflation is attributed to multiple factors, including tariffs, increased costs in goods like apparel and furniture, as well as rising shelter and food prices.

How do tariffs affect inflation, according to the script?

Tariffs are seen as inflationary because they raise import costs, which are passed on to consumers. However, some argue that U.S. consumers are 'tapped out' and may not be able to bear the increased costs, forcing businesses to absorb some of the tariff-related expenses.

Why is the bond market important in the context of tariffs?

The bond market plays a key role because its reactions to economic conditions, such as rising yields, can influence decisions about implementing tariffs. A significant increase in bond yields could pressure President Trump to delay or cancel tariff plans.

What has President Trump's position been regarding inflation in recent months?

President Trump previously claimed that there was 'virtually no inflation,' but after the release of the CPI inflation report, he changed his stance to say there is 'very low inflation.' He is now pushing for an immediate 3% interest rate cut.

What were the chances of the Federal Reserve cutting interest rates before and after the CPI report?

Before the CPI inflation report, there was a 95.3% chance that the Federal Reserve would not cut rates at the July meeting. After the report, this chance increased to 97.4%, suggesting that the Fed is less likely to cut rates due to the higher-than-expected inflation.

How did the Federal Reserve’s outlook change for the September meeting after the inflation report?

Before the inflation report, there was a 60.3% chance of the Federal Reserve cutting rates at or before the September meeting. After the report, this probability dropped slightly to 55.9%, indicating reduced expectations for an immediate rate cut.

What is expected to be the main focus of the next Federal Reserve meeting?

The main focus of the next Federal Reserve meeting is expected to be how tariffs are affecting inflation, as this will influence the Fed's decision on interest rates.

How does President Trump view the Federal Reserve's approach to interest rates?

President Trump has grown impatient with the Federal Reserve's cautious approach and is repeatedly calling for immediate and significant rate cuts, including a 3% reduction.

What is the broader economic context surrounding the decisions on tariffs and interest rates?

The economic environment is highly interconnected, with factors such as tariffs, inflation, bond market movements, and Federal Reserve decisions all influencing each other. These elements shape the decisions on inflation and interest rates, making the situation complex and evolving.