Analyzing the Impact of Tariffs on US Inflation: A CPI Deep Dive
Economists have been warning that tariffs would push up US inflation since the trade war initiated by President Trump. The US June Consumer Price Index (CPI) report, released recently, is providing insights into this assessment. After four months of forecasters overestimating CPI readings, they now anticipate an acceleration in inflation for June. Price increases in tariff-affected categories, such as furniture, toys, recreational goods, and automobiles, are expected to end a period of sustained moderate inflation.
According to economists' consensus forecasts, both the headline and core CPI are expected to rise by 0.3% month-over-month in June. Year-over-year, the headline and core CPI are projected to record gains of 2.7% and 3%, respectively, well above the Federal Reserve's target level.
The First Real Sign of Tariff-Driven Inflation?
Federal Reserve officials and private sector forecasters widely believe that inflation will rebound this summer as companies begin to pass on the costs of Trump's tariffs to consumers. While many companies initially protected consumers by stockpiling goods early and absorbing some costs by sacrificing profit margins, some firms now have no other choice.
"The June CPI is the first indicator showing that tariffs are really starting to have a noticeable impact," said Chris Hodge, chief US economist at Natixis CIB Americas.
Hodge added, "I'm watching autos and apparel. Price increases in both of those sectors were very low last month, which is out of sync with market expectations," he said. "Both sectors are highly sensitive to increased tariffs."
Companies' Strategies to Mitigate Tariff Impact
"Companies are still mitigating the impact of tariffs through multiple strategies," said Gregory Daco, chief economist at EY-Parthenon. He anticipates that tariffs will contribute one-third of the monthly increase in June's CPI and that the impact will be even greater later this summer. "Over time, the impact of tariffs will intensify."
Last week, Trump escalated the trade war by announcing higher tariffs on copper and goods from Canada, Brazil, and other countries. Some punitive tariffs that were scheduled to take effect in July have been postponed to August, and Trump has said that he will not extend the deadline – further exacerbating the threat of inflation.
"The President is clearly imposing a new round of higher tariffs on multiple countries, and the risk of tariff-induced inflation is far from over," said Scott Anderson, chief US economist at BMO Capital Markets.
How are Businesses Reacting?
A New York Federal Reserve survey in May showed that about three-quarters of firms are offsetting rising costs caused by tariffs by raising prices. Other surveys have also shown that companies are inclined to raise prices, and businesses themselves have made it clear: Toyota plans to raise prices this month, while retailers such as Nike are targeting price increases in the fall.
In addition to goods, economists and policymakers will be closely watching service inflation. Some forecasters believe that moderate categories in recent months (such as airline tickets and hotels) may show resilience in June, driving an acceleration in the overall CPI.
In a report, Goldman Sachs said, "Our estimates reflect a significant acceleration in inflation in most core commodity categories, but with a limited impact on core service inflation, at least in the short term."
Multiple Influences on Inflation
Anna Wong, Estelle Ou, and Joshua Danial Say of Bloomberg Economics believe, "The June CPI may be similar to the previous three months, indicating that tariffs continue to pass through to consumer prices, but the pressure is offset by key commodities such as used and new cars and services such as airline tickets and hotels."
Is the Federal Reserve Being Overly Cautious?
The Federal Reserve has defended its decision to keep interest rates unchanged this year, citing expectations that tariffs would drive up inflation, but this has not yet materialized. If June's CPI performance is moderate again, the Federal Reserve will almost certainly face even harsher criticism from Trump: He has repeatedly called for interest rate cuts and has directly criticized Chairman Powell.
Wells Fargo said that even if the data might show that inflation is beginning to pick up again, it would not be enough to alarm Federal Reserve officials at this stage. The institution said, "With a weaker labor market and further declines in service sector inflation, a rise in core inflation caused by tariffs may be more of a bump than a trend."
Potential Volatility in Trade Policy
Although Trump has escalated his tariff threats, Samuel Tombs, chief US economist at Bloomberg Macroeconomics, pointed out that Trump has made compromises in the past and may do so in the future.
"That does not mean that there will not be short-term volatility – there may be weeks when tariffs are at very high levels," Tombs said. "But companies and supply chains are evolving and have begun to adapt to this volatility."
The minutes from the Federal Reserve's June monetary policy meeting released last week showed that officials disagreed on "how tariffs would affect inflation and the path of monetary policy." Powell was cautious about a rebound in inflation.
"We expect to see some higher readings this summer," Powell said at a conference in Portugal on July 1, adding that policymakers are prepared to accept results that "may be higher or lower than expected, sooner or later."
But some officials – such as Trump-appointed governors Waller and Bowman – have indicated that they may support an interest rate cut in July if inflation remains moderate; others believe that action is more likely later this year.
"I think current interest rates are too high, and I can consider cutting interest rates in July," Waller said at an event in Dallas last Thursday. "My view may be in the minority, but I have clearly explained the reasons from an economic point of view, and this has nothing to do with politics."
Market Expectations and Potential Reactions
However, money markets have not placed a high probability on this happening, with current pricing showing that the probability of an interest rate cut by the Federal Reserve in July is less than 5%. Markets currently expect the Federal Reserve to cut interest rates by 50 basis points before the end of the year, with the first cut expected in September. However, it remains to be seen whether these expectations will hold after the release of US CPI data.
In fact, expectations that the Federal Reserve will delay raising interest rates have risen due to the new tariffs imposed by Trump and the resilience of the US labor market. The CME Group's Fed watch Tool shows that the chance of an interest rate cut by the Federal Reserve in September is currently about 60%, down from 65% at the beginning of the month.
Upside Potential for Gold Still Exists
While awaiting the US June inflation report, traders began to take profits after gold prices touched a three-week high of $3,375.
Higher-than-expected US CPI month-on-month or year-on-year figures may reinforce the Federal Reserve's patience, thereby reducing expectations that the Federal Reserve will cut interest rates twice this year. This scenario may help the dollar continue its recovery, putting pressure on non-yielding gold. If the data is lower than expected, the price of gold may get a new boost.
Fxstreet analysts point out that after the price of gold rebounded from the 21-day Simple Moving Average support level of $3,339, it is still likely to retest the 23.6% Fibonacci retracement level of $3,377 from the record high set in April. The 14-day Relative Strength Index (RSI) is rising slightly above the midline and is currently close to 54, indicating that there is still upside potential.
If gold can break through the 23.6% Fibonacci level of $3,377 on the daily chart, it will open a new round of upside, moving towards the round number mark of $3,400 and the static resistance at $3,440.
On the other hand, if sellers enter at higher prices, the price of gold may fall back, retracing to the 21-day Simple Moving Average of $3,339. If the price continues to fall below this level, the support level of the 50-day Simple Moving Average of $3,325 will be exposed, and once broken, the 38.2% Fibonacci retracement level of $3,297 will come into focus again.
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