Tariff "Inflation Bomb" Countdown: US June CPI May Accelerate Rise as Trump and Federal Reserve Intensify Game of Chess

According to Zhitong Finance APP, economists have long warned that tariffs will drive up inflation in the United States. The upcoming consumer price report will test whether their judgment is accurate. After four consecutive months of overestimating the Consumer Price Index (CPI), forecasters expect that the June CPI data released by the U.S. Bureau of Labor Statistics on Tuesday will show an acceleration in inflation; prices for categories affected by tariffs, such as furniture, toys, entertainment products, and automobiles, are expected to rise, ending a previous series of moderate price data.

This presents a tricky situation for the Federal Reserve. The Fed has maintained a position of keeping interest rates unchanged this year, citing expectations that tariffs will push inflation upward, although this has not yet materialized. If this CPI data remains moderate, it will almost certainly infuriate U.S. President Trump again—he has repeatedly called for the Fed to cut interest rates and has publicly criticized Fed Chairman Jerome Powell.

Federal Reserve officials and private sector forecasters generally believe that as companies begin to pass on the tariffs imposed by Trump to consumers, inflation will rise this summer. While many companies initially chose to absorb some of the higher costs by increasing inventory in advance or sacrificing profits to protect consumers, some of their coping strategies are now becoming strained.

Gregory Daco, chief economist at EY-Parthenon, stated, "Companies are still employing various strategies to mitigate the impact of tariffs." He expects that tariffs will account for one-third of the overall monthly increase in the CPI for June, with a larger impact expected later in the summer, "but over time, this impact will intensify."

This risk was further amplified last week as Trump intensified his tough rhetoric on trade, announcing higher tariffs on copper and goods from countries like Canada and Brazil. Some of these harsher tariffs are now expected to take effect in August, having originally been set for July, and Trump has stated that he will not extend the effective date.

Scott Anderson, chief U.S. economist at BMO Capital Markets, said, "Clearly, since Trump now seems to be throwing a series of higher tariff rates at multiple countries, we are obviously not out of the threat of tariff-induced inflation."

As of May, a survey by the New York Fed showed that about three-quarters of companies have raised prices to offset the higher costs caused by tariffs. Other surveys also indicate that companies tend to raise prices, and companies themselves acknowledge this: Toyota (TM.US) plans to raise prices this month, while retailers like Nike (NKE.US) plan to adjust prices in the fall.

In addition to commodity prices, economists and policymakers will also closely monitor inflation in the service sector. Some forecasters believe that items that have performed steadily in recent months, such as airfare and hotel accommodations, may see some increases in June, driving overall CPI upward The minutes of the Federal Reserve's June policy meeting released last week show that officials have differing views on how tariffs will affect inflation and the resulting monetary policy path. Powell expressed concern about the rebound in prices. On July 1, Powell stated at a meeting in Portugal, "We expect to see some higher inflation data this summer." He added that policymakers are prepared to accept the possibility that the impacts may be "higher or lower, sooner or later than we expect."

Economists Anna Wong, Estelle Ou, and Joshua Danial stated, "The CPI report for June may be similar to the previous three months, showing a trend of tariffs continuing to pass through to consumer prices; however, pressures in key categories such as new and used cars, as well as services like airfare and hotel stays, will be somewhat offset."

Investors currently expect that the Federal Reserve is unlikely to cut interest rates at the meeting at the end of this month. Some officials—such as Federal Reserve Governor Waller and Bowman, who were appointed by Trump—have indicated that they would be willing to cut rates in July if inflation remains moderate. Others believe that the likelihood of taking action later this year is greater.

Samuel Tombs, Chief U.S. Economist at Pantheon Macroeconomics, pointed out that despite Trump's recent tariff threats, he has made concessions before and may do so again. Samuel Tombs stated, "This is not to say that there won't be another 'brief surge' in tariffs in the short term—tariff levels could be very high for a few weeks. But businesses and supply chains are evolving, and they are gradually learning to factor in this volatility."