The moderate increase in the U.S. Consumer Price Index (CPI) for June may mark the beginning of inflationary pressure triggered by tariffs, as long expected by the market. However, the strength and persistence of this trend remain uncertain. According to the latest data, the CPI rose by 0.3% month-over-month in June — the largest gain since January — while the year-over-year increase accelerated from 2.4% in May to 2.7%. The core CPI (excluding food and energy) rose 0.2% month-over-month, with the annual rate coming in at 2.9%, slightly below the expected 3.0%.
Despite the overall uptick in inflation, the divergence between goods and services inflation — along with core CPI coming in below expectations for the fifth consecutive month — has placed the Federal Reserve in a dilemma over its monetary policy path. According to the CME FedWatch tool, after the CPI release, the probability of the Fed holding rates steady in July stood at 97.4%, with only a 2.6% chance of a 25-basis-point cut. For September, the probability of no change is 38.6%, a 25-basis-point cut is priced in at 59.9%, and a 50-basis-point cut at 1.6%.
Source: U.S. Bureau Of Labor Statistics
Tariffs Push Up Goods Prices, But Services Inflation Remains Weak
A key feature of the June CPI report was the notable increase in goods prices — particularly in categories heavily affected by tariffs such as toys, furniture, appliances, and clothing. This suggests that some companies have begun passing higher import costs on to consumers. However, price gains in services were relatively mild, especially in demand-sensitive sectors such as airfares, hotels, and motels, reflecting the dampening effect of weak consumer demand on the service sector. In addition, falling prices for new and used vehicles further helped ease overall inflation pressure.
Source: U.S. Bureau Of Labor Statistics
This divergence raises questions: Will the Trump administration’s tariffs lead to broad and sustained inflation? Some companies have absorbed additional costs by stockpiling inventory early or accepting thinner profit margins, temporarily shielding consumers from price shocks. However, as the average effective U.S. tariff rate surged from 2.4% in January to 20.6% as of July 14 — the highest since 1910 — inflation data in the coming months could face stronger upward pressure.
June’s inflation reading alone does not provide a definitive signal. The CPI results for July and August will be critical. If upcoming data suggest tariffs have only a limited impact on inflation, the Fed may lean toward rate cuts to support the economy. Conversely, if inflation accelerates, policymakers may be forced to keep rates on hold or even consider tightening again.
Fed Remains Cautious: Timing of Rate Cuts Still Uncertain
The June CPI data provided no clear direction for the Federal Reserve. On the one hand, lower-than-expected core CPI supports the view among some Fed officials that tariffs may only cause a one-time price shock rather than sustained inflation. On the other hand, the rise in goods prices may signal broader price pressures ahead, especially if businesses continue passing on tariff costs.
Fed Chair Jerome Powell recently noted that the bar for rate cuts is now "somewhat lower" than in the spring, suggesting that the Fed sees inflation risks as weaker than previously expected. If upcoming data show only moderate inflation and signs of labor market softening, Powell may open the door to rate cuts as early as September. However, if tariffs exert greater inflationary pressure in the July and August CPI data, the Fed may remain on hold to assess whether inflation proves persistent.
Currently, futures markets reflect little chance of a rate cut in July, but show a higher probability of a 25-basis-point cut in September. This aligns with divisions within the Fed — some officials favor preemptive cuts to guard against economic downturns, while others focus more on potential inflation risks and prefer to hold rates steady.
Trade Tensions Escalate: Stagflation Risks Emerging
The June CPI report comes amid rising global trade tensions. The Trump administration recently issued new tariff threats to over 20 countries, proposing 35% tariffs on Canadian goods, 30% on imports from Mexico and the EU, and 15–20% tariffs on most other trade partners. In response, the EU is actively seeking negotiations while preparing potential retaliatory measures.
This deterioration in the trade environment has heightened concerns over the risk of U.S. stagflation — a scenario where slowing economic growth coincides with rising inflation. If companies continue to raise prices due to tariffs while consumer demand weakens amid economic uncertainty, the U.S. could face the challenge of low growth combined with high prices. Such a scenario would weigh on the U.S. dollar and further complicate the Fed's policy decisions.
Market Reactions
The U.S. Dollar Index initially dropped 40 points following the CPI release, but later rebounded sharply by 60 points after the U.S. market opened. Having rebounded for 10 days from its three-year low of 96.3, the dollar posted a strong daily gain and now appears poised to retest the 99.5 level — a key resistance zone in late May and June. Although the CPI came in below expectations and is typically bearish for the dollar, the modest inflation rebound fulfilled some expectations of tariff-driven inflation, thereby tempering rate-cut expectations and supporting the dollar.
The Nasdaq 100 $NASDAQ(.IXIC)$ opened higher and hit a new record, but later gave up gains and closed with a doji candle. The index is now facing resistance at the July high of 22,920. After yesterday’s false breakout, today’s action will determine whether a meaningful pullback is underway.
The S&P 500 $S&P 500(.SPX)$ followed a similar path but underperformed slightly, also retreating after an initial pop and returning to a sideways trading range. If the 6,290 level continues to hold as resistance, the risk of a correction will grow.
The Dow Jones $Dow Jones(.DJI)$ Industrial Average ($US30) was the weakest of the major indices. After failing to break the double-top at 45,000 (from early 2025) in early July, it has pulled back and now appears to be forming a descending channel. There are no clear signs of a bottom yet, and traders are watching whether the 43,800 level will provide support.
Invesight Viewpoint
Overall, the U.S. economy stands at a crossroads. The combination of tariff-related uncertainties, potential inflationary pressures, and slowing global growth makes the Fed’s policy outlook particularly complex. The data and policy moves over the next few months will determine whether the U.S. heads toward more accommodative monetary policy — or remains stuck in a difficult balancing act between inflation and growth.
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