Although the headline annual rate came in slightly ahead of expectations (2.7% against 2.6%) the monthly print came inline so this slight beat can largely be attributed to rounding. Core inflation managed to squeeze in just below the estimate and remained under 3% so on the surface of things, this should be taken as a reasonably encouraging inflation report. Â
Looking further within the data, we saw some continued pricing pressure coming from food and some new monthly increases from the basket for energy. However, on an annual basis energy continues to apply deflationary pressure to the overall index. Within core inflation, shelter, having been slow to normalise, continued to make modest progress downwards with the category now standing at 3.8% on an annual basis having been at over 5% this time last year. We did start to see a slight tick up in core goods, even as new and used car prices continued to fall in June. This could be a sign that we’re starting to see some inflationary pressure from tariffs creeping in, but it’s likely too soon to tell definitively.Â
With that in mind markets are going to be focused on Trump and tariffs this month, as the US president’s self-imposed August 1 deadline looms. Currently 30% tariffs against some of the US’s largest trading partners, Mexico and the EU, have been threatened. However, it is yet to be seen if, or for how long, these tariffs could be implemented and if we could see a repeat of the TACO trade becoming the story once again.Â
US treasury yields fell slightly following the release, whilst US equity futures rose slightly. Â
Bottom line
While this inflation report isn’t especially alarming, the tick up in core goods, and the continued uncertainty around future tariff rates could still make the Federal Reserve and Powell hesitant to want to cut rates, even as US President Trump insisted yesterday ‘we have no inflation’.
Comment provided by Nathaniel Casey, Investment Strategist at Evelyn Partners.
