Core Viewpoint - The current interest rate cut cycle by the Federal Reserve may not replicate the decisive and aggressive policy execution seen in previous cycles due to the conflicting dual mandate of maintaining price stability and full employment [3][11]. Economic Conditions - The labor market data is missing due to the government shutdown, and the economy is facing slowing pressures. Tariff policies are expected to accelerate inflation transmission, pushing core inflation to 3.5% in the second half of the year [4][8]. - The global economy is experiencing significant slowdown, with the U.S. economic growth expected to drop from nearly 3% in 2023 and 2024 to between 1.5% and 2% this year [13]. Federal Reserve's Challenges - The lack of reliable economic data due to the government shutdown complicates the Federal Reserve's policy decisions, leading to a "blind flying" situation without crucial labor market indicators [6][10]. - The Fed's cautious approach to rate cuts is influenced by the current economic conditions, with expectations of only one more rate cut this year as they await better information [10][11]. Inflation and Tariff Impact - The transmission of tariffs to inflation has been slower than expected, but it is anticipated to accelerate, with core inflation projected to rise to 3.5% by year-end [8][12]. - The current high tariff rates, around 16%-17%, are expected to further complicate the Fed's dual mandate of managing inflation and labor market conditions [8][12]. Global Economic Outlook - The global growth rate is projected to be around 2.4% this year, significantly below the historical trend of 2.7%-2.8% [13]. - Emerging markets have shown relative resilience, with smaller-than-expected impacts from tariffs and progress in controlling inflation, but there are concerns about potential negative trade data in the second half of the year [14][15][16]. Future Risks - The inflation shock from U.S. tariffs may pose a significant downside risk to the global economy in 2026, potentially leading to a reassessment of market expectations regarding the Fed's policy path [17].

Inflation Data Summary - In June 2025, the U.S. CPI increased by 2.7% year-on-year, slightly above the expected 2.6% and up from the previous value of 2.4%[1] - Month-on-month, the CPI rose by 0.3%, matching expectations and higher than the previous month's increase of 0.1%[1] - The core CPI also saw a year-on-year increase to 2.9%, in line with expectations and up from 2.8% previously[1] Economic Implications - The June inflation data provides some relief to the Federal Reserve, although tariff impacts are becoming more pronounced, particularly in clothing and furniture prices[4] - Core CPI has underperformed expectations for five consecutive months, primarily due to declining housing prices and weak automotive demand[4] - The Federal Reserve is likely to consider a rate cut in September, driven by the risk of economic stagnation outweighing inflation concerns[4] Sector-Specific Insights - Energy prices significantly influenced the CPI, with energy CPI rising by 0.9% month-on-month, marking the largest increase of the year[5] - Core services, particularly housing, have weakened, counteracting gains in other service categories, while automotive prices remain depressed[8] - Core goods CPI increased by 0.2% month-on-month and 0.7% year-on-year, with notable price rises in clothing (0.4%), furniture (1%), and leisure products (0.8%)[9] Market Dynamics - High interest rates continue to suppress housing demand, while the automotive sector faces challenges from both weak demand and competitive pricing pressures from overseas[8] - The impact of tariffs on consumer prices is becoming more evident, with over half of companies indicating a willingness to pass on 50%-75% of cost increases to consumers[26]

Inflation Data Overview - In June, the US CPI increased by 2.7% year-on-year, slightly above the expected 2.6% and up from the previous 2.4%[3] - Month-on-month, the CPI rose by 0.3%, matching expectations and higher than the prior 0.1%[3] - Core CPI also saw a year-on-year increase to 2.9%, in line with expectations, and a month-on-month rise of 0.2%, below the expected 0.3%[3] Federal Reserve Outlook - The June inflation data provides some relief to the Federal Reserve, but the mixed results raise questions about future interest rate cuts[3] - A September rate cut remains the baseline scenario, although two more inflation reports are pending before the meeting[3] - The current economic environment suggests that risks of stagnation may outweigh inflation concerns, potentially influencing the Fed's decision in September[3] Key Influences on CPI - Energy prices significantly impacted CPI, with a month-on-month increase of 0.9%, the largest rise this year, while year-on-year energy CPI improved from -3.5% to -0.8%[4] - Core CPI has underperformed expectations for five consecutive months, primarily due to declining housing prices and weak automotive demand[4] Consumer Demand Dynamics - High interest rates are cooling housing demand, while consumer spending is being constrained by previous overconsumption and elevated rates[5] - The automotive sector is experiencing a dual challenge of weak demand and price reductions from both domestic and foreign suppliers, particularly in light of tariff impacts[5] Price Trends in Core Goods - Core goods CPI rose by 0.2% month-on-month and 0.7% year-on-year, marking the highest increase this year, with notable price rises in clothing (0.4%), furniture (1%), and leisure products (0.8%)[6] - The increase in prices for imported goods indicates a faster transmission of tariff impacts compared to previous months[6] Risks and Considerations - Potential risks include significant changes in US trade policies and unexpected tariff expansions that could lead to a global economic slowdown[7]

Core Viewpoint - The upcoming May CPI data is expected to be a turning point for the U.S. economy, potentially reshaping the Federal Reserve's interest rate expectations and market risk pricing logic due to the impact of tariffs on consumer prices [1][10]. Group 1: CPI Predictions - The May CPI is projected to increase by 0.3% month-over-month, consistent with April's growth, and a year-over-year increase of 2.5%, up from 2.3% in April [2]. - Core CPI is expected to rise by 0.3% month-over-month and 2.9% year-over-year, compared to 0.2% and 2.8% in April, respectively [2][4]. Group 2: Tariff Impact - Economists believe that the May CPI data will mark the beginning of inflation readings related to tariffs, with the impact expected to last until the end of the year [4]. - Goldman Sachs anticipates a moderate increase of 5 basis points in core CPI, primarily driven by categories such as entertainment, communications, and furniture [4][6]. Group 3: Transmission Effects - There is concern about the amplification of transmission effects from tariffs, with expectations of a monthly increase of about 10-15 basis points in core inflation from June to August [5][6]. - If significant price acceleration does not occur, the market may debate whether the transmission effects are merely due to data delays or if exporters and retailers are absorbing a larger share of tariff costs [7]. Group 4: Key Trends in CPI Components - Key trends highlighted by Goldman Sachs include a projected 0.5% decrease in used car prices, a 0.1% increase in new car prices, and a moderate rise of 0.4% in auto insurance prices [8]. - Categories particularly affected by tariffs, such as clothing, furniture, and education, are expected to see mild upward pressure [8]. Group 5: Market Reactions and Risks - The significance of the CPI data extends beyond short-term market volatility, as it may redefine the Federal Reserve's policy framework and market risk pricing logic [10]. - There is a noted asymmetry in market reactions to inflation shocks, with the implied volatility of the S&P 500 index significantly lower than in April, indicating insufficient preparation for potential shocks [12]. Group 6: Federal Reserve's Stance - The debate within the Federal Reserve regarding the impact of tariffs on inflation is intensifying, with some officials suggesting that the effects may be more persistent than previously thought [16][17]. - Current market pricing indicates expectations for rate cuts by the end of the year, with a significant probability of multiple cuts [18].