US inflation accelerated in June to 2.7%. What will happen to the rate now?

US inflation accelerated to 2.7% in June, further deviating from the Fed's 2% target. Investors were expecting this report with the hope that it would increase the chances of a rate cut, but the data reinforced the regulator's cautious stance. Now the market practically excludes the probability of a rate cut in July and expects easing in September;

Inflation rose in June as President Donald Trump's imposed duties gradually began to take a toll on the U.S. economy, writes CNBC. The Consumer Price Index (CPI), a broad measure of the cost of goods and services, rose 0.3% for the month, bringing the annual inflation rate to 2.7%, the Bureau of Labor Statistics reported Tuesday. The data was fully in line with the Dow Jones consensus forecast, although the annual rate was the highest since February, the broadcaster noted. By comparison, it was 2.4 percent in May. At the same time, economists surveyed Bloomberg, on average, counted on inflation of 2.6%. The Financial Times, which cited that estimate, called the increase steep. 

Excluding volatile food and energy prices, core inflation (Core CPI) rose 0.2% for the month - even less than Wall Street expected. The annual rate was 2.9% - right in line with forecasts. 

Car prices declined over the month, with new cars falling in price by 0.3% and used cars by 0.7%. However, prices for clothing, which is sensitive to trade levies, rose by 0.4%. Furniture and household goods also rose in price - by 1%, this segment is also affected by duties.

Home prices added just 0.2% for the month, but the category was still the largest contributor to overall CPI growth, according to the Bureau of Labor Statistics. On a year-over-year basis, the home price index increased 3.8%.

Markets generally reacted calmly to the report. Government bond yields initially declined, but then began to recover. S&P 500 updated the historical maximum, rising by 0.03%, then lost growth and went into a small minus. The tech-heavy Nasdaq Composite jumped 0.6%, while the industrial Dow Jones fell by the same amount. The Russell 2000 small-company index was the hardest hit, falling 1%. The VIX volatility index fell 1.1%, indicating growing confidence in the markets;

While the impact of duties on prices was mixed in June, there are early signs that trade fees are starting to affect the cost of goods, CNBC points out. Tuesday's data are unlikely to significantly change Fed officials' calculations ahead of their next meeting in late July, writes Barron's. However, market participants are betting that the regulator may start cutting interest rates in Sept.

The probability of that happening, according to the futures market assessment the agency publishes, remained at about 60%. And the number of those expecting a rate cut at the end of the July meeting fell further, from 5% to 2.6%, according to data from the CME FedWatch market expectations monitoring tool.

Fed Chairman Jerome Powell has warned several times that the Fed wants to see more data before making monetary policy decisions. That said, he said the impact of duties on prices should show up in June, July and August. The June CPI is the first of three key inflation reports that will determine the Fed's actions before meeting in September, Barron's reminds.

"With [core] inflation coming in below expectations for the fifth consecutive month, it may seem that there are no discernible signs yet of the duty-induced inflationary surge the Fed is waiting for. However, price increases in categories such as home furnishings, leisure goods and apparel suggest that duties are gradually starting to affect the cost of basic goods," wrote Principal Asset Management's chief global strategist Sima Sha, her quoted by Yahoo Finance. She also noted that trade restrictions typically show up in data on a delayed basis, and since many goods were imported in advance, only limited categories of goods have been affected by the price increases so far. And the recent wave of new trade fees suggests that the Fed would be wise to hold off on policy changes in the coming months, the strategist believes.

"June marked the fifth month since the imposition of duties against our three largest trading partners, but there has been no spike in inflation. Proponents of the 'we need more data' approach at the Fed are likely to regain the upper hand at the meeting later this month, but if current trends continue, there could be pressure for a more serious rate cut as early as September - as there was last year," FHN Financial chief economist Chris Lowe said.

This article was AI-translated and verified by a human editor