June CPI data shows tariff impacts materialising

The June CPI report came in as expected, bringing the annual headline increase to 2.7%, a tick-up from last month’s 2.4% reading. Meanwhile, core inflation rose 2.9%, softer-than-expected for the fifth straight month. The tariff-related impact on prices is gradually materializing, though its overall effect is offset by ongoing weakness in travel and tourism demand.

Report details

• Monthly headline inflation rose 0.3% in June, as expected, with the annual rate accelerating to 2.7%—from 2.4% previously. Core inflation, which strips out food and energy, came in lower than expected, increasing 0.2% in June, with the annual rate rising to 2.9%. While the signs of the tariff-induced boost to overall inflation are still modest, trade policy remains a moving target. The fresh levies announced since the survey period for today’s inflation data suggest that the rolling impact of tariffs on prices should be increasingly felt in the months ahead.
• Food prices increased 0.3% in June, with prices for food at home also rising 0.3% as three of the six major grocery store food groups increased. Driving the rise was a 0.9% increase in fruit and vegetables prices, which are highly vulnerable to tariffs. Moreover, this segment is also likely to be impacted by labor shortages amid heightened immigration enforcement, potentially putting additional upward pressure on consumer inflation expectations in the short term. Energy prices increased by 0.9% in June, amid a rebound in gasoline and fuel prices, likely due to the escalation of the Israel-Iran conflict in June.
• Core inflation continues to be driven mainly by services prices, which rose 0.3% for the month. While shelter was the most significant contributor to overall inflation again this month, owners’ equivalent rent showed continued signs of softness, increasing only 0.3%, a downshift compared to the two-year average of 0.5%. Meanwhile, weakness in travel demand continued to weigh on airfares and lodging away-from-home prices, which declined by 0.1% and 2.9%, respectively.
• Core goods prices rose 0.2% during the month, with the effect of tariffs increasingly felt in categories largely sourced abroad, such as household furnishings, recreational commodities, and apparel, which rose 1%, 0.8%, and 0.4%, respectively. Yet, the front-loading of both purchasing activity at the start of the year and lingering inventory drawdown likely contributed to a weaker tariff pass-through effect, particularly for autos, which saw new and used vehicle prices continue to fall, declining 0.3% and 0.7%, respectively.
• The Fed's preferred supercore inflation measure increased by 0.2%, bringing the annual rate to 3% from 2.9% prior. This measure excludes shelter from core services and is primarily driven by wage costs, which have declined since the middle of last year alongside a softer U.S. labor market.

Policy outlook

The Fed’s ability to cut rates rested heavily on today's inflation print. With price pressures coming in softer-than-expected for the fifth month in a row, it may initially seem like there is still little sign of the tariff-induced boost to inflation that the Fed has been expecting. However, with increases in tariff-sensitive categories like household furnishings, recreation, and apparel, import levies are slowly filtering through to core goods prices.

Indeed, tariffs typically take several months to feed through inflation data, as the significant front-loading of imports implies that tariffs have still not been widely applied to many imported goods—yet. Moreover, the fluid nature of trade policy suggests that tariff levels may continue to fluctuate significantly. Overall, while any tariff induced boost to inflation is likely to be temporary, given the latest announcement of higher tariffs beginning in August, it would be wise for the Fed to remain on the sidelines for at least a few more months.