U.S. Stocks Plunge as Inflation Surges 2.7% on Trump Tariffs

U.S. stocks experienced a sell-off as investors reacted to the latest inflation data, which showed a rise to 2.7%. This increase, driven largely by President Trump's trade tariffs, has created an inflation "pipeline" that is expected to continue pushing prices higher. The rapid rise in inflation has caught the attention of Wall Street, leading to a decline in U.S. stocks and a global sell-off in markets.

The direction of inflation is a significant concern for investors. The 30 basis point increase in inflation was described as the fastest this century, according to analysts. This has led to a shift in expectations for the Federal Reserve's interest rate policy. The likelihood of a rate cut in September, as priced by the CME Fedwatch probability market, has dropped from 75% to 50%. The Fed typically fights inflation by raising interest rates, making borrowing more expensive and choking off demand.

The tariffs imposed by the Trump administration are a key driver of the current inflationary pressures. Economists have been anticipating the impact of these tariffs on prices, and the latest data shows that tariff costs are becoming more visible. Core goods prices, excluding autos, rose by 0.5% in June, the most significant increase since June 2022. This trend is expected to continue, with even larger price rises anticipated in the coming months.

The inflationary impact of the tariffs is not limited to specific goods. Household appliances, for example, saw their biggest monthly price jump in records dating back to 1999. This trend is expected to spread across the consumer basket as the full impact of the tariffs is felt. The weak U.S. dollar is also contributing to inflation by making imported goods more expensive. The dollar has declined by 9% year-to-date, further exacerbating the inflationary pressures.

These developments have significant implications for the Federal Reserve's monetary policy. Despite President Trump's calls for interest rate cuts, the Fed is unlikely to comply given the rising inflation. The Federal Open Market Committee, composed of 12 members plus a rotation from regional Fed banks, is supported by a large team of researchers and economists who are focused on accurately assessing the economic situation. They are unlikely to lower interest rates if inflation continues to erode the value of the U.S. dollar.

From a stock market perspective, the situation is challenging. Stocks thrive in an environment of cheap money, but the current tariff policy is pushing the Fed in the opposite direction. As new tariffs are implemented, the price of imported goods is expected to rise further, making a rate cut less likely. Whether President Trump can navigate out of the policy cycle he has created remains uncertain.