U.S. factory inflation gains raise doubts about Fed rate cuts
Recent data show that U.S. consumer and producer price indexes have risen more than anticipated—fueling concern that inflation may linger and delay Federal Reserve rate cuts.
Key inflation indicators:
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Consumer Price Index (CPI): In June, headline CPI increased by 0.3% month-over-month—the fastest monthly gain since January—pushing annual inflation to ~2.7%. Core CPI (excluding food and energy) rose to ~2.9% year-over-year
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Producer Price Index (PPI): May saw a 0.1% rise in final demand PPI, marking the first notable increase since spring and signaling early factory inflation
These increases are tied closely to updated tariffs on imports—especially appliances, furnishings, apparel, and electronics—which are starting to ripple through wholesale and retail pricing
Market fallout and shifting expectations
• Bond yields climb: The 30‑year Treasury yield recently hit ~5.02%, the highest since May, driven by inflation concerns rather than fiscal deficits
• Stronger dollar: Global markets saw the dark thrills, as the U.S. dollar surged while Asian stocks sold off, reflecting a diminished likelihood of near-term Fed rate cuts
• Soft equities: The S&P 500 slipped ~0.4% and the Dow fell ~1% after the CPI surprise, though Nasdaq rose due to tech rally (led by Nvidia)
Fed officials ready to react—cautiously
Boston Fed President Susan Collins highlighted tariffs as a contributor to inflation, forecasting core CPI to hover near 3% by year-end. However, she maintained an “actively patient” posture—willing to wait for more economic evidence before adjusting rates .
Similarly, Fed Chair Powell has warned that the summer’s inflation data will be crucial in determining whether tariff-fueled price gains are temporary or entrenched—emphasizing that the Fed will “wait for clearer data” before committing to action
Why the tariff pinch matters
Tariffs left over from 2024 are causing delayed inflation: businesses initially absorbed costs but are now starting to pass them on—particularly in discretionary goods. Economist Daniel Hornung described June as the first CPI release where “tariffs are beginning to show up materially” in key categories
Economists suggest these forces could keep core inflation near or above the Fed’s 2% target, making any rate cuts less certain for the rest of 2025 .
Market implications & outlook
Investors now see roughly ~43 basis points of fed funds cuts priced in for the rest of the year, and the chances of a September rate cut have fallen to around 56.5%. While some analysts still expect a cut later in the year, sprinting moves appear unlikely as inflation shows signs of persistence .