June CPI Data Sparks Debate: Trump and Market Interpretations at Opposite Poles
The U.S. June CPI report released on Tuesday presents an intriguing scenario. The data shows that after removing the more volatile food and energy costs, the core CPI rose by 0.2% month-over-month, slightly below the economists' forecast of 0.3% but above May's 0.1% increase. This marks the fifth consecutive month where the core CPI data was lower than market expectations, giving Trump new grounds for argument.
Former President Trump quickly took to social media, once again urging the Federal Reserve to significantly cut interest rates, stating, "The Fed should lower rates by 300 basis points. Inflation is very low. Could save one trillion dollars annually!" He clearly interpreted the slightly lower-than-expected core CPI data as evidence supporting his aggressive rate cut stance.
However, the financial market's reaction was completely different from Trump's interpretation. After the CPI report was released, both U.S. equity and bond markets came under pressure: the Dow Jones Industrial Average closed down over 400 points, and the S&P 500 fell 0.4%. Meanwhile, the 30-year Treasury yield rose above 5%, and the 10-year Treasury yield also increased by 6.4 basis points to 4.487%, hitting a new high since June 11. Typically, rising yields indicate that investors expect interest rates to remain high or increase further.
Market Sides with Powell: Tariff Impact Emerging, Rate Cut Expectations Diminish
Contrary to Trump's optimistic judgment, Wall Street traders and analysts generally believe that this CPI report instead supports the Federal Reserve's cautious, hold-steady stance. They point out that although overall inflation data met expectations, signs of rising prices in certain goods suggest Trump's tariff policies may be gradually increasing the living costs for Americans.
Seema Shah, Chief Global Strategist at Principal Asset Management, stated that despite core inflation data consistently falling short of expectations, a closer analysis reveals that rising prices in categories such as home furnishings, entertainment, and apparel suggest that import tariffs are gradually being transmitted to core goods prices. For instance, in June, U.S. apparel prices rose by 0.4% month-over-month, shoe prices increased by 0.7%, and furniture and bedding prices, which had fallen in May, also rose by 0.4%. These may be early signals of tariff cost pressures starting to be passed on to consumers.
Omair Sharif, President of Inflation Insights LLC, plainly stated that excluding automobiles, June core goods prices rose by 0.55%, the highest since November 2021, proving that "tariffs are starting to have an impact."
Analysts generally believe that the full inflationary impact of tariffs may take longer to fully manifest. Therefore, it would be wise for the Federal Reserve to remain on the sidelines in the coming months. The CME FedWatch tool showed that after the release of the CPI report, investors' expectations of the Fed keeping rates unchanged at its July meeting rose to 97%. More importantly, the likelihood of a rate cut in September significantly dropped after the report, at one point falling close to 50%.
This means that the market widely believes that although June's core CPI slightly missed expectations, its internal structure and concerns over tariff impacts give the Federal Reserve more reason to maintain current policies in the short term, rather than cutting rates swiftly as Trump hopes. On "CPI Night," the financial markets seem to have tipped the balance in favor of Powell, not Trump.
