What did the June CPI report reveal?

US inflation rose to its highest level since February last month, as the impact of tariffs appeared to start filtering through to the world’s largest economy.

The annual consumer price index figure increased to 2.7% over the 12 months to June, up from 2.4% in May, and up 0.3% month-on-month. Food, energy and housing costs were all drivers of the increase, while commodity prices weakened.

Prior to this latest reading, inflation had been broadly moderating — hitting 2.3% in April — and had looked to be getting closer to the Federal Reserve’s 2% target.

While the annual inflation figure was slightly hotter than forecast, core inflation cooled modestly, offering some reassurance to markets and policymakers, says Damian McIntyre, Senior Portfolio Manager and Head of the Multi-Asset Solutions Team at Federated Hermes.

“The bottom line is that the print was in-line with expectations and continues to give Fed chair Jerome Powell room to wait. The pace of shelter inflation continues to grind lower, and core services inflation is holding steady. Importantly, average hourly earnings are still growing which is supporting purchasing power,” McIntyre says.

“Equities and bond yields were volatile post-release but quickly stabilized, which reflects a market still digesting the Fed’s next move. We maintain a balanced portfolio stance, overweight equities with a tilt toward value and emerging markets, and a defensive posture in fixed income,” he adds.

The latest figure is likely to renew focus on the relationship between the White House and the Federal Reserve (Fed). President Donald Trump has repeatedly urged the Fed to cut rates from the current range of 4.25% to 4.50% in recent weeks. The last rate cut was in December 2024.

However, the Fed’s Federal Open Market Committee (FOMC) has shown reluctance to cut rates, citing uncertainty regarding the long-term economic impact of tariffs.

Tariffs and the potential ripple effect

The Trump administration enacted a baseline 10% tariff on nearly all US imports on April 5, and the subsequent rollout of country and sector-specific tariffs has been difficult to predict. A temporary pause on “reciprocal” tariffs is set to expire on August 1, after the deadline was extended from July 9.

In discussing their outlooks for inflation last month, FOMC participants noted that increased tariffs were likely to put upward pressure on prices. There was considerable uncertainty, however, about the timing, size, and duration of these effects.

Fed chair Jerome Powell — an increasingly frequent focus of Trump’s ire — has said the Fed needs to be “humble” about the ability to forecast to what extent tariffs will be passed on to the consumer, and how much will be absorbed by other participants in the supply chain.

Federated Hermes Fixed Income Investment Director Karen Manna says the latest inflation report does not reflect the full extent of the situation.

“Markets are likely to dismiss this report as premature, given it doesn’t yet reflect the tariff levels currently under White House consideration. Attention remains sharply focused on sector-specific tariffs and their potential ripple effects across the economy. Markets will remain choppy but in a tight range,” she says.

The S&P 500 Index has maintained its rebound over the last month, rising 5.3% since June 18.