US June inflation spikes 30 bps to 2.7%; as tariffs start to pinch

16 Jul 2025 , 12:09 PM

CONSUMER INFLATION REARS ITS UGLY HEAD IN THE US

Last month, we had mentioned that the 10 bps rise in consumer inflation may be the trailer before the bigger picture. June 2025 saw the headline inflation spiking by 30 bps to 2.7%. The markets, ironically, celebrated the fact that core inflation had spiked less than expected to 2.9%. However, that is not to digress from the truth that reciprocal tariffs are starting to have an impact on inflation. That is something the FOMC had always been apprehensive of, and now it looks like rate cuts in the US may be of the table for now.

TARIFF IMPACT PUTS PRESSURE ON ALL 3 INFLATION BASKETS

The tariff impact led to hardening of food, energy, and core prices in June 2025.

Inflation Basket Category	Jun 2025 (YOY)	May 2025 (YOY)	Inflation Basket Category	Jun 2025 (YOY)	May 2025 (YOY)
Food Inflation	3.00%	2.90%	Core Inflation	2.90%	2.80%
Food at home	2.40%	2.20%	Commodities less food and energy	0.70%	0.30%
·          Cereals and bakery products	0.90%	1.00%	·          Apparel	-0.50%	-0.90%
·          Meats, poultry, fish, and eggs	5.60%	6.10%	·          New vehicles	0.20%	0.50%
·          Dairy and related products	0.90%	1.70%	·          Used cars and trucks	2.80%	1.80%
·          Fruits and vegetables	0.70%	-0.50%	·          Medical care commodities	0.20%	0.30%
·          Non-alcoholic beverages	4.40%	3.10%	·          Alcoholic beverages	1.40%	1.50%
·          Other food at home	1.30%	1.40%	·          Tobacco and smoking products	6.30%	6.30%
Food away from home	3.80%	3.80%	Services less energy services	3.60%	3.60%
·          Full service meals and snacks	4.00%	4.20%	Shelter	3.80%	3.90%
·          Limited service meals	3.50%	3.50%	·          Rent of primary residence	3.80%	3.80%
Energy Inflation	-0.80%	-3.50%	·          Owners’ equivalent rent	4.20%	4.20%
Energy commodities	-7.90%	-11.60%	Medical Care Services	3.40%	3.00%
·          Fuel oil	-4.70%	-8.60%	·          Physician Services	3.00%	2.90%
·          Gasoline (all types)	-8.30%	-12.00%	·          Hospital Services	4.20%	3.60%
Energy services	7.50%	6.80%	Transport Services	3.40%	2.80%
·          Electricity	5.80%	4.50%	·          Motor vehicle Maintenance	5.20%	5.10%
·          Natural gas (piped)	14.20%	15.30%	·          Motor vehicle insurance	6.10%	7.00%
Headline Consumer Inflation	2.70%	2.40%	·          Airline Fare	-3.50%	-7.30%

Data Source: US Bureau of Labor Statistics

Fed policy is based on PCE inflation, although CPI inflation sets the tone for PCE inflation.

• Food inflation in June was up 10 bps to 3.0%. Upward pressure came from fruits, dairy, vegetables, and non-alcoholic beverages; offset by fall in meat, fish, eggs, and cereals.
• Energy inflation in June 2025 hardened 270 bps to -0.8%. Upward pressure came from spike in electricity, gasoline, and fuel oil; offset by a fall in piped gas prices.
• Core inflation in June was up at 2.9%. Downward pressure from new vehicles, alcoholic beverages, and motor insurance; offset by spike in apparel, used cars, and air fares.

The rise in inflation is substantial at 30 bps; although the 10 bps spike in core inflation was lower than what the markets had pencilled.

JUNE 2025 MOM INFLATION PICKS UP TO 0.3%

Here is the high frequency month-on-month (MOM) inflation for last 6 months.

Month	Food (MOM)	Energy (MOM)	Core (MOM)	Headline (MOM)
Jan 2025	0.4%	1.1%	0.3%	0.5%
Feb 2025	0.2%	0.2%	0.2%	0.2%
Mar 2025	0.4%	(2.4)%	0.1%	(0.1)%
Apr 2025	(0.1)%	0.7%	0.2%	0.2%
May 2025	0.3%	-1.0%	0.1%	0.1%
June 2025	0.3%	0.9%	0.2%	0.3%

Data Source: US BLS (negative figures in brackets)

High frequency inflationary pressure is evident in the headline MOM inflation. Most of the pressure is coming from energy inflation, due to a spike in crude prices, followed by an increase in core inflation on account of escalating supply chain constraints.

CME FEDWATCH – RATE CUTS TO BE BACK-ENDED

Here is how the CME Fedwatch probabilities (based on implied Fed Futures trades) look after June 2025 US CPI inflation.

Fed Meet	200-225	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450
Jul-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	3.1%	96.9%
Sep-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	1.6%	52.5%	45.8%
Oct-25	Nil	Nil	Nil	Nil	Nil	Nil	0.8%	27.7%	49.1%	22.3%
Dec-25	Nil	Nil	Nil	Nil	Nil	0.6%	18.9%	42.1%	31.1%	7.3%
Jun-26	Nil	Nil	0.7%	4.9%	15.8%	27.6%	18.1%	16.8%	5.4%	0.7%
Dec-26	0.3%	1.6%	5.9%	14.3%	23.2%	25.3%	18.4%	8.5%	2.2%	0.3%

Data source: CME Fedwatch

The higher inflation has not changed expectations too much; although rate cuts are more likely to be back-ended.

• The first rate cut of 2025 has just 55% probability in Sep-25, but looks more likely in October 2025 with a probability of 77.7%.
• By Dec-25, probability of 50 bps rate cut remains fairly high at 61.6%. However, this probability may reduce sharply if inflation continues to remain elevated.
• The CME Fedwatch is pencilling in 2 more rate cuts of 25 bps each in the year 2026; which is likely to be distributed between the first half and second half of the year.

As of now, it looks like the first rate cut will only happen in October 2025; with a strong possibility of 2 rate cuts by December 2025. In 2026, the probability of 2 additional rate cuts is still quite high; pegging the Fed rates in the range of 3.25%-3.50% by end of 2026.