Macro Consensus Challenger: June CPI Benign but 2026 Risks Rising

Summary

• June core CPI was below expectations.
• Passthrough from tariffs to goods was stronger this time but there was no evidence of inflation contagion to non-tariffed goods or to services.
• Medical care prices (largely administered) drove a limited acceleration in services inflation.
• Nevertheless, the pre-tariff trend of goods inflation acceleration resumed while inflation pressures from immigration and fiscal policies are rising.

Market Implications

• Because the Fed is concerned by a sustained inflation increase rather than by price level increases, I still expect two-three cuts in 2025 starting with a risk management cut in September, against markets pricing 1.7 cuts.
• I expect at most one cut in 2026 due to inflationary pressures and to the Fed staying independent, against markets pricing 2.5.

Another Negative CPI Surprise

June core CPI was again below expectations while headline was in line (Tables 1 and 2).

Overall, the print was benign as there was evidence of stronger tariff passthrough, but it was limited. Long term, yesterday’s data together with recent economic developments indicates rising inflation risks.

This is why I agree with the swap market pricing of Q4 CPI at 3.4% YoY on average, implying lower headline PCE than the Fed’s SEP forecast of 3.4% (Chart 1). Long term, I disagree with the swap market’s pricing of disinflation (Chart 2).

Table 1: Sam’s Model Predicted Downside Core Surprise

Table 2: Higher June Core CPI

Chart 1: Market in Sync With Fed for Q4	Chart 2: Market Too Optimistic on Medium-term CPI

Stronger Tariff Passthrough but No Second Round Effect

Core goods price inflation accelerated to 20bp MoM, up from May’s 4bp MoM decrease. This was largely due to a 1% MoM increase in furniture (Chart 3). Other categories with high import penetration such as consumer electronics or apparel were either flat or had mildly elevated inflation (0.4% MoM for apparel). By contrast, new car prices were down 0.3% MoM.

The greater passthrough reflects implementation of Trump administration tariffs. Customs revenue represented 8% of goods imports in May, which likely increased in June (Chart 4). Meanwhile, importers have partly absorbed tariffs. Import prices (measured before tariffs in the US) increased in April-May but this followed four months of deflation. Overall, import prices remain below their level of early 2025, when President Trump’s tariff announcements accelerated.

Most importantly, used car prices that are not subjected to tariffs, fell. This suggests limited inflation contagion from tariffed to non-tariffed goods.

It is unclear whether the administration’s latest announced tariff increases will be implemented.

Lastly, food prices have been trending up and are now at a 2.5ppt clip, double the pre-pandemic pace (Chart 6). Research by economists at the St Louis Fed shows that, out of all CPI components, food inflation has the highest predictive value for future headline inflation.

Chart 3: Stronger Tariff Passthrough	Chart 4: Rising Effective Tariffs
Chart 5: Importers Eating Up Tariffs	Chart 6: Food Prices Trending Up

Stable Shelter Costs

Shelter costs slowed to 18bp MoM from May’s 25bp MoM. The slowdown reflected lower hotel costs as OER inflation was virtually unchanged (30bp MoM up from May’s 27bp, Chart 7). OER inflation remains above market rent inflation, suggesting further downside (Chart 8). Market rent inflation has also been slowing, hinting at weaker demand.

In addition, weaker demand was present with hotel and motel prices that fell 3.6% MoM, the third consecutive month of price decline. Hotel and motel prices are down 8% versus February. This is striking because hospitality is one of the sectors most dependent on undocumented migrants and therefore hit hardest by the administration’s crackdown. That prices are still falling despite labour shortages shows the extent of demand weaknesses.

Chart 7: Unchanged OER Inflation	Chart 8: Market Rent Inflation Slowing

Administered Prices Driving Supercore Inflation Increase

Supercore services inflation accelerated to 21bp from May’s 6bp (Chart 9). The acceleration was driven by a 56bp increase in medical care services, up from May’s 18bp (Chart 10). Excluding health insurance (an inputted rather than directly observed price) medical services inflation was 48bp, up from May’s 14bp.

However, medical care prices tend to reflect insurance and ultimately Medicare rates rather than short-term demand pressures. Other components of supercore inflation signal weak demand.

Meanwhile, airfares fell a further 0.1%, the fifth consecutive month of decline (Chart 11). Airfares are now 14% lower than in January.

Recreation services prices were also soft, up 23bp MoM but flat versus March. The price of admission to sporting events fell 1.5% following May’s 8.6% MoM decline. Ticket prices are now down 21% versus March (Chart 12).

Chart 9: Higher Supercore Inflation	Chart 10: …Driven by Medical Care
Chart 11: Airfares Continued To Deflate	Chart 12: Soft Recreation prices

Overall, June CPI was benign. There is no evidence that inflation is spilling over to non-tariffed goods or to services. Medical prices (largely administered) accounted for about 0.75% of June’s acceleration in MoM supercore inflation. Weak demand is keeping price increases in check.

However, long-term inflation trends appear less favourable.

Long-term Inflation Pressures Building Up

Measures of CPI 12m change show only a small acceleration in June (Chart 13). In addition, market-based long-term inflation expectations remain stable (Chart 14).

Yet yesterday’s data shows a resumption of the long-term trend of core goods inflation acceleration, starting in mid-2024 long before the tariff increases (Chart 15). This likely reflects long-term structural factors that I will explore. It implies that, by contrast with pre-pandemic, the Fed can no longer count on goods price deflation to offset high shelter inflation, reflecting the US housing shortage.

Also, inflationary demand and supply shocks are likely to hit the US economy in 2026. First, as I highlighted last November, following the end of the immigration surge, US population aging is slowing labour force growth. So far this year payrolls have averaged 130K (Chart 16). Next year, based on pre-pandemic CBO economic projections, NFP could slow to a 50K monthly average. This negative supply shock will lift inflation and lower growth.

In addition, the impact of tariffs so far has been muted by extreme policy uncertainty that has weakened business and consumer demand. Next year by contrast, economic uncertainty is likely to be lower or at least private sector agents will have adapted. Furthermore, the economy is likely to get a fiscal stimulus. How large this stimulus will be depends on tariff policy but I reckon it could represent about 0.5ppt of GDP.

The combination of goods prices trending up, much slower growth in the labour force and fiscal stimulus could put a floor under 2026 inflation. The FOMC likely had similar concerns when they lowered the 2026 FFR cuts to one in June’s SEP from two cuts in March’s SEP.

Chart 13: Small Pickup in 12m Inflation	Chart 14: Long-term BEs Remain Stable
Chart 15: Unfavourable Inflation Trend	Chart 16: Slower Growth in Employment

Market Consequences

Market pricing of 2025 Fed cuts fell following CPI with the Dec 2025 FFR rising to 3.89% from 3.84% and the September 2025 FFR rising to 4.19% from 4.16% before CPI. I disagree. The Fed is not concerned by a tariff-driven increase in prices but rather by risk of a lasting inflation increase. I could not find much evidence of the latter in yesterday’s release.

To the contrary, the data was consistent with my view that demand weaknesses are keeping the price impact of tariffs in check. This view also supports a risk management FFR cut in September, to balance risks the slowdown could become a recession against risks of higher persistent inflation.

Therefore, I still expect two-three Fed cuts in 2025, starting at the September FOMC against markets pricing, post-CPI, 1.7 2025 cuts.

By contrast, in 2026 I think the market is overpricing cuts. They currently price 2.5 cuts that seems unlikely due to inflation risks and to my expectations the Fed will stay independent, which I will explore. Therefore, I expect at most one cut next year.

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