Tariff "inflation bomb" countdown: US June CPI may accelerate Trump's game with the Fed intensifies

Economists have long warned that tariffs will push up US inflation. The upcoming consumer price report will test whether their judgments are accurate. After overestimating the Consumer Price Index (CPI) for four consecutive months, forecasters expect the June CPI data to show an acceleration in inflation when released by the US Bureau of Labor Statistics on Tuesday; price increases in categories affected by tariffs such as furniture, toys and recreational goods, as well as automobiles, are expected to put an end to the previous series of moderate price data. This poses a tricky situation for the Federal Reserve. The Fed has maintained a stance of keeping interest rates unchanged this year, citing expectations that tariffs will push inflation up, although this scenario has not yet occurred. If the CPI data this time remains moderate, it is almost certain to anger US President Trump once again - who has repeatedly called for the Fed to cut rates and publicly criticized Fed Chair Powell. Fed officials and private sector forecasters generally believe that inflation will rise this summer as companies begin to pass on the tariffs imposed by Trump to consumers. While many companies initially chose to absorb some of the higher costs through preemptively increasing inventory or sacrificing profits to protect consumers, some of their coping measures are now running out of steam. Chief economist at EY-Parthenon Gregory Daco said, "Companies are still using various strategies to mitigate the impact of tariffs." He expects tariffs to drive up one-third of the overall monthly CPI increase in June, with even greater impacts later in the summer, "but over time, this impact will intensify." This risk was further amplified last week as Trump intensified his hardline trade rhetoric, announcing higher tariffs on copper and goods from countries such as Canada and Brazil. Some of these more severe tariffs are currently expected to take effect in August, previously scheduled for July, and Trump has stated that he will not extend the deadline. Chief US economist at BMO Capital Markets Scott Anderson said, "It's clear that since Trump now seems to be throwing out a series of higher tariff rates to multiple countries, we are obviously not out of the threat of tariff inflation." As of May, a survey by the New York Fed showed that about three-quarters of companies have raised prices to offset higher costs resulting from tariffs. Other surveys also show that companies are inclined to raise prices, and companies themselves acknowledge this: Toyota Motor Corp. Sponsored ADR (TM.US) plans to raise prices this month, while retailers like NIKE, Inc. Class B (NKE.US) plan to adjust prices in the fall. In addition to goods prices, economists and policymakers will also closely monitor services inflation. Some forecasters believe that stable projects in recent months, such as airfare and hotel accommodations, may see a slight increase in June, driving an acceleration in overall CPI. Minutes from the Fed's June policy meeting released last week showed diverging views among officials on how tariffs will affect inflation and the monetary policy path determined by this. Powell expressed concern about the rebound in prices. Powell said on July 1st at a conference in Portugal, "We expect to see some higher inflation data this summer." He added that policymakers are prepared to accept the possibility that the impact may be "higher or lower, earlier or later than expected." Economists Anna Wong, Estelle Ou, and Joshua Danial said, "The June CPI report may be similar to the previous three months, showing the continued trend of tariffs being passed on to consumer prices, but pressures in key categories such as new and used cars, as well as services like airfare and hotels, will offset this." Investors currently expect that the Fed is unlikely to cut rates at the end of this month. Some officials - such as Fed Governors Waller and Bowman appointed by Trump - have stated that they would be willing to cut rates in July if inflation remains moderate. Others believe that the likelihood of taking action later in the year is greater. Chief US economist at Pantheon Macroeconomics Samuel Tombs pointed out that despite Trump's recent tariff threats, he has previously made concessions and may do so again. Samuel Tombs said, "This is not to say there won't be another fleeting surge in tariffs in the short term - tariffs could be very high for a few weeks. But businesses and supply chains are evolving, and they are gradually learning to take into account these fluctuations."