Americans are paying more to look good, feel good, and, yes, even smell good.
That’s partly because tariff-sparked inflation rose higher in June than in May year-over-year.
💵💰Don't miss the move: Subscribe to TheStreet's free daily newsletter💰💵
The Federal Open Meeting Committee (FOMC) of the Federal Reserve Bank will vote later this month on how monetary policy will react to the updated inflation data.
Related: White House makes bold decision on Fed Chair Powell's future
Fed watchers say this a strong signal how interest rates will impact American borrowing from mortgage rates to credit cards to student and auto loans.
How inflation, interest rates intersect
The FOMC sets the nation’s monetary policy in accordance with its legal dual mandate of ensuring an inflation rate of 2% annually and stable employment with solid economic growth.
Rising prices can decrease employment rates, and higher job numbers lead to increased inflation. Interest rates are the tool by which the FOMC sets monetary policy to balance its goals of keeping the economy from slipping into recession or stagflation.
The FOMC decided unanimously last month to hold the Federal Funds Rate steady at 4.25% to 4.50%, while describing the U.S. economy as “stable.”
The reason: expected inflation from President Donald Trump’s proposed tariffs – now facing an Aug. 1 deadline – creeping through the U.S. supply chain this summer and manifesting later this year.
Related: Fed official voices blunt 3-word message on Fed rate cuts
The benchmark funds rate is tied to the cost of borrowing money which is why auto and student loans, plus credit cards, have crushing short-term interest rates in the post-pandemic economy.
The 10-year Treasury yield is the benchmark for longer-term interest rates like the 30-year fixed mortgage. The market expectations for how the Fed will set rates in the future influences long-term rates.
When the 10-year yield goes up, so do mortgage rates in general. And vice versa.
The Fed’s “wait-and-see” approach to holding the Federal Funds Rate steady will be on the FOMC agenda for review in late July.
Inflation rates heat up across most sectors
The Bureau of Labor Statistics said June 15 that the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3% in June on a seasonally adjusted basis, after rising 0.1% in May.
Over the last 12 months, the all-items index increased 2.7%, while the all-items less food and energy, or core CPI, rose 2.9%.
Prices that increased over the last month include:
- Household furnishings and operations.
- Medical care.
- Recreation.
- Apparel.
- Personal care.
Energy prices rose 0.9% in June as the gasoline price increased 1.0% over the month as summer travel ramped up. The index for food increased 0.3% over the month, up 3.0% over 12 months.
Prices for used cars and trucks, new vehicles and airline fares were among the major indexes that decreased in June.
The CPI increase of 2.7% for the 12 months ending in June was higher than the 2.4% increase in May. The 2.9% core CPI reading was up from 2.8%.
TheStreet Pro’s veteran trader Chris Versace said these new CPI numbers indicate “the flow through of higher prices associated in part with tariffs.”
“These are not the kind of figures that are going to spur the Fed into rate-cutting action in the near term, and from our perspective, it solidifies a July rate cut being off the table despite what some Fed heads have said recently,” Versace wrote. “It also speaks to Fed Chair (Jerome) Powell’s comments about the impact of tariffs working their way through the system.”
More Federal Reserve:
- Fed interest rate cut decision resets forecasts for the rest of this year
- Federal Reserve prepares strong message on long-term interest rates
- Fed official revamps interest-rate cut forecast for this year
Trump repeated his demand for an interest rate cut after the CPI numbers were announced.
“Fed should cut Rates by 3 Points. Very low inflation. One Trillion Dollars a year would be saved!!!,’’ he wrote on his Truth Social platform.
With inflation rising slightly and job numbers relatively stable, the CME Group’s closely watched FedWatch Tool forecast a 2.6% chance of an interest rate cut later this month.
Earlier in July, Powell told a global economic conference that the independent central bank was focusing on doing its job to comply with its dual mandate set by Congress.
The last Fed Funds Rate cut came in December 2024.
Most Fed watchers and market analysts look to September as the next possible rate cut pending updated economic reports.
Related: Tariff uncertainty resets inflation, July interest rate cut bets
