Analysts believe the tariff impact is just starting to show up in inflation numbers
While the odds of the Federal Reserve cutting rates in July were already very small, they decreased on Tuesday with the release of the latest inflation numbers. Both main inflation numbers increased as analysts believe the impacts of tariffs are starting to show up.
The Bureau of Labor Statistics released the latest Consumer Price Index (CPI) on Tuesday, which showed a 2.7% annual increase. That figure was up from the 2.4% increase in May and was a slightly higher month-over-month increase than expected.
Core CPI, which does not include food and energy costs, increased 2.9% year over year, slightly up from May’s 2.8% bump. The increase was slightly smaller than experts had forecast.
Sam Williamson, senior economist at First American, believes that while the increase was anticipated, the impacts of tariffs may be starting to show up in the report.
“Consumer prices accelerated from June on a seasonally adjusted basis, but the uptick was in line with consensus expectations,” Williamson said. “While shelter costs remained the primary driver of inflation, rising 0.2% month-over-month, the uptick in consumer prices signals that companies may be beginning to pass tariff-related costs on to consumers, a dynamic the Federal Reserve will monitor closely in the next few months.”
CME FedWatch, which tracks the likelihood of changes in the Fed rate based on the 30-day Fed Funds futures prices, has all but thrown in the towel for July. After showing a 23% chance of a cut one month ago, the index shows just a 2.6% chance of a decline in July.
The index still prices in two cuts for the rest of 2025, with one scheduled for September and another for December. Williamson believes the Fed will continue to be patient with its potential rate cuts.
“While a September rate cut remains a possibility, today’s report likely reinforces the Fed’s cautious stance on rate moves,” Williamson said. “With inflation signals still mixed, the Fed appears inclined to wait for clearer evidence before making any policy moves.”
Shelter led increases
According to the report, the 0.2% increase in shelter costs was the primary factor in the all items monthly increase. Shelter has increased by 3.8% year over year.
Household furnishings and operations rose 1% in June after a 0.3% increase in May. Many experts believe that tariffs may have directly contributed to the larger increase.
Housing affordability challenges, combined with elevated interest rates, have led to a significant slowdown in the housing purchase market.
Analysts believe the initial impacts of the Trump administration’s aggressive tariff policy could be showing up in the July numbers. This doesn’t include newly threatened tariffs against Canada, the European Union, and dozens of other countries, which are set to take effect on August 1 unless trade agreements are reached.
Jerome Powell, Federal Reserve Chair, has said that the central bank would have cut rates if not for the unknown impacts of tariffs.
President Trump announced a sweeping 35% tariff on Canadian imports, escalating a trade dispute between the two allies. https://t.co/AcD57Ik1Pz
— Mortgage Professional America Magazine (@MPAMagazineUS) July 14, 2025
The Fed’s lack of action has enraged the Trump administration, which has called on Powell to resign and has floated the idea of removing him before his term ends in 2026. Some economists believe the decision to remove Powell could cause major volatility in the US market.
Energy increases sharply
Energy costs, after a decline in May, increased 0.9% in June. Overall, the figure is down 0.8% from last June. Gasoline and fuel oil were both up in June, rising by 1.0% and 1.3% respectively. However, both continue to be down year over year.
In addition to the increases in household furnishings and operations, there were also increases in medical care, recreation, apparel, and personal care.
Food was another area that continued to rise, with a 0.3% increase in June. The index has increased by 3.0% since last June, with both food at home and away from home experiencing both monthly and year-over-year increases.
Decreases were observed in used cars and trucks, as well as in new vehicles and airline fares.
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