US CPI Preview: Inflation Data to Test Fed’s Tariff Assumptions and Policy Expectations
By Kyle Rodda
Date: 14 July 2025
Overview
The upcoming June US Consumer Price Index (CPI) report, set to be released on June 15, is anticipated to have significant implications for the Federal Reserve's monetary policy, particularly in light of potential new tariffs. This report is crucial as it may influence the Fed's stance on inflation and its future policy decisions as the economy moves into the latter half of the year.
Inflation Expectations
Economists predict a modest increase in both headline and core CPI. Specifically, headline inflation is expected to rise from 2.4% to approximately 2.6% year-on-year, while core inflation (excluding food and energy) is projected to increase from 2.8% to 2.9%. On a monthly basis, core CPI is anticipated to accelerate from 0.1% to 0.3%. These expectations stem from concerns that tariffs, which have previously had a limited impact on consumer prices, may start to exert upward pressure on inflation as businesses begin to pass on costs to consumers.
Current Impact of Tariffs
Despite fears of inflation due to tariffs, the actual impact has been somewhat disinflationary thus far. Recent data indicates that weaker demand has countered potential supply-side cost pressures, leading to a slowdown or decline in price growth in certain sectors, particularly services. Many firms have postponed price increases, anticipating that tariff threats might be mitigated. However, as existing inventories are depleted, companies may soon have to raise prices if tariffs remain or escalate.
Implications for Federal Reserve Policy
The timing of the CPI release is critical for the Federal Reserve, which has refrained from further rate cuts, partly due to expectations that tariffs will lead to a temporary increase in inflation. If the June CPI data is lower than expected, it could challenge this assumption and increase the likelihood of renewed policy easing, especially if accompanied by signs of weakening demand or labor market conditions. Conversely, a stronger-than-expected CPI could reinforce the Fed's current stance and diminish the chances of imminent rate cuts.
Market Reactions
The CPI report will also have significant implications for market dynamics. Much of the recent optimism in risk assets has been based on the belief that inflation will remain subdued, allowing the Fed to cut rates if necessary. However, with new tariffs recently announced, including substantial rates on European goods, the market's expectations may shift based on the CPI results. An upside surprise in inflation could lead to a reassessment of near-term rate cuts, strengthening the US Dollar and negatively impacting equities. Conversely, a downside miss could bolster the disinflation narrative and trigger a rally in risk assets as the prospect of Fed easing becomes more likely.