Washington- U.S. inflation came in hotter than expected in June, driven by rising prices in key consumer categories and early signs of tariff-driven increases. The Consumer Price Index rose 0.3% from May and 2.7% over the past year, up from a 2.4% annual rate in May, according to the Labor Department report released Tuesday.
Key Takeaways
- U.S. inflation rose 0.3% in June, pushing the annual rate to 2.7%, with core inflation at 2.9%.
- Prices for appliances, furniture, and apparel jumped, reflecting the early effects of new import tariffs.
- Shelter costs continued to rise, while airfare and used car prices softened slightly.
- Fed rate cuts now appear delayed, with markets shifting expectations to September or beyond.
Core inflation, which excludes food and energy, rose 0.2% on the month and 2.9% over the past year. The data marks the biggest monthly headline jump since January and adds fresh uncertainty to the Federal Reserve’s timeline for cutting interest rates.
Core Inflation (Year-over-Year) – January to June 2025
Month | Core CPI (YoY) | Headline CPI (YoY) |
January 2025 | 3.2% | 3.1% |
February 2025 | 3.1% | 3.0% |
March 2025 | 3.1% | 3.2% |
April 2025 | 3.0% | 3.1% |
May 2025 | 2.8% | 2.4% |
June 2025 | 2.9% | 2.7% |
Tariff impact begins to show in goods inflation
Prices for household furnishings climbed 1% in June, and appliances rose 0.8%, the largest increases in more than a year. Analysts say these gains reflect the early impact of newly implemented tariffs on goods imported from China, Mexico, and other countries. Clothing prices rose 0.4%, also showing signs of cost pass-through as retailers adjusted to rising import costs.
At the same time, shelter costs rose another 0.4%, accounting for more than two-thirds of the overall increase. Rent prices, which had briefly cooled in spring, rose again and remained one of the largest contributors to overall inflation.
Airline fares dipped slightly by 0.1%, and used car prices continued to ease, falling 0.3% in June, offering some relief on the services side. Gasoline prices were flat for the month.
Economists say the sharp pickup in goods pricing, combined with persistent housing costs, points to growing inflation stickiness just as many expected a summer cooling trend. While some Fed officials had hinted at a possible rate cut as early as July, markets are now pushing those expectations further out.
Federal Reserve faces challenge as markets push out rate-cut bets
The hotter-than-expected inflation print is already shifting expectations for monetary policy. Prior to the June report, many investors had been betting on a possible rate cut at the July Federal Reserve meeting. But after Tuesday’s numbers, those odds dropped sharply.
It is expected that he Fed to leave its benchmark overnight interest rate in the 4.25%-4.50% range. Futures markets now reflect expectations for a potential cut in September at the earliest if inflation shows signs of easing by then.
Fed officials have not issued any immediate comments following the CPI release, but recent statements suggest a growing divide. Governor Lisa Cook had previously signaled support for beginning rate cuts in summer, citing slowing wage growth. But others, including Governor Christopher Waller and Boston Fed President Susan Collins, have called for patience, pointing to inflation risks from tariffs and housing.
Traders are also paying close attention to upcoming data releases, including the June Producer Price Index (PPI) due later this week and the Personal Consumption Expenditures (PCE) price index scheduled for late July. If both continue the trend seen in June’s CPI, the Fed may be forced to hold rates steady longer than expected.
Markets slip, yields climb after inflation surprise
Bond yields rose sharply following the inflation report, as investors adjusted to the possibility of higher-for-longer interest rates. The yield on the 10-year Treasury note climbed to 4.48%, its highest level in two weeks. Short-term yields also moved up, reflecting the shift in near-term rate expectations.
Stocks opened lower on Tuesday, with the S&P 500 down around 0.6% by midday. Financials and consumer discretionary sectors saw the biggest declines, while energy and utilities remained relatively flat. The dollar strengthened modestly against major currencies, particularly the euro and yen.
Market strategists noted that while the inflation report wasn’t alarming on its own, the combination of tariff-related pressure and sticky core inflation has added a layer of uncertainty for investors hoping for clarity from the Fed.
Outlook uncertain as tariff impact still unfolding
Looking ahead, economists say the full impact of new tariffs may not be felt until later this summer. Some importers had pre-shipped goods before the tariffs took effect, which helped dampen immediate price spikes. But July and August CPI readings may show stronger effects as inventories reset and shipping costs adjust.
Wells Fargo’s economic research team said in a note that if July inflation remains elevated, the Fed may hold rates until the final quarter of 2025. Others, including Barclays and Morgan Stanley, expect a rate cut in September but warned that the Fed could skip it if shelter inflation continues to rise.
Several analysts also noted the risk of inflation re-acceleration heading into the fall, especially if consumer demand remains strong and labor markets stay tight.
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