Will tariffs impact US prices? 🔎📃
At 1:30 PM BST, the latest Consumer Price Index (CPI) reading for the United States for June will be released. The U.S. dollar is slipping ahead of the publication, although the market’s expectation of rising inflationary pressure may support the greenback through hawkish Fed policy speculation.
What to Expect from U.S. Inflation:
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In June, prices are expected to rise 0.3% month-over-month (vs. +0.1% in May) and 2.6% year-over-year (vs. +2.4% in May).
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Core inflation is also expected to rise: +0.3% m/m (May: 0.1%) and +2.9% y/y (May: 2.8%).
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Tariffs are expected to drive up prices of products like furniture, toys, recreational goods (e.g., sports equipment), clothing, and audio equipment. Companies are less able to absorb tariff costs, as stockpiles have been depleted, which will negatively impact margins.
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Food prices are expected to rise moderately (+0.4% m/m), mainly due to meat and imported goods.
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Energy prices are likely to remain stable: gasoline may rebound +0.8% m/m after a -2.6% drop, electricity is forecast to rise +1%, while natural gas prices may fall -1%.
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Service-sector price pressure is expected to ease, driven by deflationary trends in airfares, lodging (hotels), and leisure services.
Can the Macro Data Clear Up the Uncertainty?
Fed officials believe the full effects of the trade war may only be visible from August or even year-end. Meanwhile, many economists expect tariffs to impact prices already in today’s inflation report.
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Rent prices remain the main contributor to U.S. inflation, and the trade war may affect the prices of imported goods, which will be in the spotlight today. That implies possible increases in other segments like used cars, new vehicles, alcoholic beverages, food products, and tobacco.
Even though fuel prices remain low and aren't currently a source of inflationary pressure, tariffs present a visible risk. In the latest ISM Services report, companies cited the trade war as the main factor behind elevated prices and costlier supply chain components. The price subindex remains high, though still significantly lower than during the COVID period.
The largest contributor to inflation – shelter (rent) prices – is on a downward path, which should help deliver lower CPI prints in the coming months. New home price dynamics have also slowed and are now in neutral territory.
Rent prices for new leases are falling sharply. As the share of new leases grows, the CPI shelter component is expected to follow this trend.
EURUSD (H1 Chart)
The U.S. dollar is clearly weakening ahead of the CPI report. EURUSD gains are also supported by euro strength, with the pair up 0.18% today. However, given the local high near 1.18120, the current rate is still 1.25% below that level. A CPI surprise to the upside would reduce expectations of Fed rate cuts this year and could strengthen the dollar. But this would require a bigger upside surprise, as the move to 2.9% core inflation is already priced into consensus.
Source: xStation 5
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