LIVE MARKETS-Tiptoe through the tariffs: CPI and Empire State

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TIPTOE THROUGH THE TARIFFS: CPI AND EMPIRE STATE

Investors began their Tuesday with a highly anticipated set of inflation numbers, which raised just as many questions as it answered.

The Labor Department's Consumer Price Index (CPI) USCPI=ECI, which tracks the prices U.S. consumers pay for a basket of goods and services, gained some heat last month.

As expected, prices rose 0.3% on a monthly basis, versus 0.1% in May. Year-over-year, the headline figure landed at 2.7%, hotter than the 2.6% consensus and marking a 0.3 percentage point increase from the previous month.

Core CPI, which strips out volatile food and energy prices and is often referred to as "underlying inflation," printed at 0.2% and 2.9% on monthly and annual bases, respectively. Both landed 0.1 ppt south of consensus but also 0.1 ppt warmer than the prior month's figures.

So, while core was a tad cooler than economists predicted, it shows price growth moving in the wrong direction, further north of Powell & Co's 2% annual inflation target.

The question on everyone's mind is whether or not Trump's tariffs, which nearly everyone agrees will boost inflation, are beginning to work their way into the data.

"This data confirms what many have been warning: tariffs are potentially moderately inflationary, and they’re beginning to show up in consumer prices," says Matt Mena, crypto research strategist at 21Shares. "However, we’ll likely need a larger sample size to fully confirm this trend."

"Tariff impacts on the economy are still in the pipeline," says Ryan Sweet, chief U.S. economist at Oxford Economics. "We expect goods inflation to accelerate."

Line-by-line, a 0.9% increase in energy prices helped drive gasoline 1.0% higher (largely due to supply worries sparked by the U.S. bombardment of Iran), while household furnishings, housing fuels, utilities, medical care and prescription drugs were hotter than the broader trend. A 0.4% decline in new/used vehicles tempered the headline number a bit.

The cost of shelter and services, two metrics closely watched by the Fed, rose 0.2% and 0.3%, respectively. Shelter and services both show year-over-year growth of 3.8%, continuing to nearly a full percentage point above the underlying measures.

But what does all this mean for monetary policy?

"This data bails out the Fed and it puts them on hold in July," Peter Cardillo, chief market economist at Spartan Capital Securities tells Reuters. "They will have to look at the July and August numbers to make a decision in September."

"All the rhetoric that's coming out of the Trump administration to replace Powell (is) backfiring on them," Cardillo adds. "These numbers prove the administration is somewhat wrong."

Skylar Weinand, chief investment officer at Regan Capital, agrees.

"If you were to look at the data and trends, and tune out the noise from the Trump administration, you would expect the Fed’s next move would be to raise interest rates," Weinand writes. "The only folks calling for lower interest rates are those within the administration and those jockeying to be the next Federal Reserve chair."

The report all but stamped out any remaining hopes that Powell and Co will lower the Fed funds rate at the conclusion of this month's policy meeting.

CME's FedWatch tool now shows a scant 2.6% likelihood of that happening. FedWatch also shows a growing 44.3% probability that the Fed will hold the key rate steady in September, with a shrinking 54.3% chance of a 25 bp cut at that time.

Pivoting to regional manufacturing, factory activity in New York State surprised to the upside by leaping back into expansion territory, notching its cheeriest reading since February.

The New York Fed's Empire State index USEMPM=ECI jumped 21.5 points, to 5.5 from -16.0, blasting past the -9.0 analyst estimate.

A negative Empire State/Philly Fed reading indicates monthly contraction.

“Business activity picked up slightly in New York State in July, representing the first increase in several months," says Richard Deitz, economic research advisor at the New York Fed. "Shipments grew, and employment picked up for a second consecutive month. Firms remained fairly optimistic about the outlook for future conditions."

On Thursday, the Philadelphia Fed will release its Philly Fed manufacturing report, which should help flesh out the picture of the current month's Atlantic region factory activity.

(Stephen Culp)

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