(Yahoo!Finance) - June's Consumer Price Index (CPI) report likely gives the Federal Reserve room to continue its wait-and-see approach to cutting rates amid uncertainty over how President Trump's tariffs will impact inflation.
On a "core" basis, which excludes volatile food and energy costs, CPI increased 0.2% from the previous month, slightly lower than economists' expectations but ahead of May's 0.1% gain.
Following the report, investors were placing a 97% probability on the Fed holding rates steady at its July meeting, up from 93% on Monday, according to the CME FedWatch Tool. Meanwhile, the chance of a September rate cut dropped sharply after the release, falling below 60% initially and inching closer to 50% as markets digested the data.
"The Fed’s ability to cut rates was resting heavily on today’s inflation print," Seema Shah, chief global strategist at Principal Asset Management, wrote following Tuesday's release.
"With inflation 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," she continued, referring to the slower-than-expected monthly gain in core prices. "However, with increases in categories like household furnishings, recreation, and apparel, import levies are slowly filtering through to core goods prices."
Indeed, apparel prices rose 0.4% in June, and footwear jumped 0.7% after several months of declines. Furniture and bedding prices also climbed 0.4%, reversing the 0.8% drop recorded in May, a potential indication that tariff-related cost pressures are beginning to reach consumers.
Shah noted that the full inflationary impact of tariffs will take time to materialize, particularly as many goods were front-loaded ahead of the latest rollouts.
"With higher tariffs being announced, it would be wise for the Fed to remain on the sidelines for a few more months at least," she added.
Greg Daco, chief economist at EY, echoed that view, noting that the full effects of tariffs have yet to unveil themselves. He believes any resulting price increases will likely be short-lived.
"A lot of businesses are talking about rapidly passing on the higher tariff shock from these higher duties. So we're anticipating a rather swift pass-through," he told Yahoo Finance. "But if we are in an environment where there are staggered tariffs over the next year, then there is a risk of more inflation persistence. And I think that's the key risk for the US economy right now."
The Fed itself has appeared divided on when to lower interest rates. Minutes from its June policy meeting revealed a split committee, with "most" officials supporting at least one rate cut this year while "a couple" signaled they'd be open to moving as early as July. Others preferred to hold rates steady through year-end.
Meanwhile, President Trump has continued his public campaign for significantly lower rates, writing on Truth Social: "Fed should cut Rates by 3 Points. Very Low Inflation. One Trillion Dollars a year would be saved!!!"
The next major inflation test for the Fed comes Wednesday, with the release of the Producer Price Index (PPI), a measure of how much prices are changing for what businesses sell. Later this month, investors will shift focus to the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) index.
But as Wall Street has consistently been reminded, the Fed’s cautious stance is being driven not just by recent inflation data but also by lingering uncertainty around President Trump's evolving tariff policy.
Ryan Sweet, chief US economist at Oxford Economics, said that if Trump's proposed Aug. 1 tariffs go into effect, the inflationary impact on goods prices could take several months to appear.
Sweet, who is currently forecasting the next rate cut in December, said this would likely keep the Fed on hold unless the labor market weakens significantly.
"The new tariffs, if implemented, could tilt the risks toward the next rate cut occurring later than in the baseline," the economist said. "The Fed could be comfortable waiting a little too long and then trying to catch up with more aggressive cuts because of the uncertainty around tariffs."
By Allie Canal · Senior Reporter
