Markets Cheer Cooler June CPI as Tariff Impact Remains Tame — For Now

U.S. inflation continued to show signs of control in June, with the latest Consumer Price Index (CPI) release coming in largely in line with expectations and doing little to change the Federal Reserve’s near-term rate path. Despite concerns about tariffs fueling price pressures, the data suggest that so far, their bite has been far less severe than feared. That trend has buoyed investor sentiment Thursday morning, with Treasury yields slipping and equities responding positively to the benign read.

WATCH: “The worst thing you can do is keep doing what works.”

Headline CPI rose 0.3% month-over-month, matching the consensus estimate, while core CPI (excluding food and energy) edged up just 0.2%, a notch below forecasts. On a year-over-year basis, headline inflation ticked up to 2.7% from 2.6% in May, while core inflation cooled to 2.9%, continuing its slow descent from the post-pandemic peak. The unadjusted CPI index rose to 322.561 in June from 321.465 in May, underscoring the steady upward drift in consumer prices, but not one alarming enough to unsettle markets.

The report showed broad-based increases in shelter, food, and energy, but nothing that suggested a breakout in inflationary momentum. Shelter costs, which have long been sticky, rose 0.2%, with owners’ equivalent rent and primary rent both up 0.3%. Food prices climbed 0.3%, including a 0.4% increase in food away from home. Energy prices also rose 0.9%, driven by a 1.0% jump in gasoline and similar increases in electricity and utility gas service.

Still, some categories stood out. Among the biggest month-over-month gainers were utility (piped) gas service (+1.5%), used cars and trucks (+1.3%), and fuel oil (+1.3%). Hospital services and motor vehicle maintenance both rose 0.7%. On the flip side, the largest price declines came from airline fares (-1.7%), motor fuel (-0.9%), new vehicles (-0.7%), medical care commodities (-0.6%), and dairy products (-0.5%). These mixed dynamics suggest inflation is being held in check by competitive pressures in goods and fading price shocks in categories like vehicles and travel.

Crucially, the data revealed only modest early signs of tariff pass-through. Despite growing alarm over the tariff front, particularly with the August 1 deadline looming for reciprocal trade measures, the CPI report shows inflationary spillovers from global trade tensions remain muted. This is likely to become a key focus in the weeks ahead as economists begin updating their models for potential tariff-induced price shocks. So far, markets appear willing to give policymakers—and supply chains—the benefit of the doubt.

The market’s reaction reinforces this view. The yield on 10-year Treasuries dipped 2 basis points to 4.41%, while two-year yields remained flat around 3.90%. The yield curve between two- and 10-year notes steepened slightly, now standing at +50.5 basis points, reflecting eased near-term inflation anxiety. Stocks rallied modestly at the open as investors welcomed the softer core reading and the apparent lack of urgency for further monetary tightening.

In terms of Fed implications, today’s report does little to move the needle. CME FedWatch data show a 97% probability that the Fed will hold rates steady in July, and odds for a September rate cut remain around 60%—not quite a majority, but approaching it. While today's numbers are directionally supportive of a cut, they’re not decisive enough to force the Fed’s hand absent additional confirming data. That leaves earnings season—and the consumer spending signals within it—as a key swing factor over the next several weeks.

From a structural standpoint, core services inflation remains the stickiest part of the puzzle. The shelter index, up 3.8% year-over-year, continues to exert outsized influence on the core CPI. Medical care services rose 0.5% month-over-month, with hospital and prescription drug prices also climbing. These are exactly the types of categories the Fed watches closely when evaluating inflation persistence.

Looking forward, August 1 looms large as a potential inflection point. That’s when newly proposed tariffs could begin to bite, and while the current data haven’t shown a meaningful impact, the forward-looking risks are very much alive. Many economists are likely to issue renewed warnings in the coming days about how future CPI prints could reflect delayed pass-through effects from trade disruptions, especially in durable goods and supply chain-intensive categories.

Until then, the calculus remains: inflation is easing, but not gone. The Fed is in wait-and-see mode. And markets are cautiously optimistic that the worst of the inflation shock has passed. Today’s CPI report won’t be the one that tips the scales on policy, but it does offer more reassurance that inflation, while still worth watching, is not spiraling out of control.

In short, the June CPI report reinforces the “slow glide” disinflation narrative, eases concerns over tariffs—at least for now—and keeps the September rate cut debate right on the edge. The real test will be whether upcoming earnings and spending data can confirm what CPI just suggested: the economy may be absorbing shocks better than anyone expected.