On any given day, my job includes filtering out the news. I start out the day with meditation and then jump right into the market events, screening for what’s truly news, what is the same old, and what is noise. From an investment standpoint, I am trying to figure out if the news will materially change my views or strengthen them, and these views are reflected in the allocation decisions. Last week, a string of popular economic news was released, and market watchers sifted through them to see if there were signs of damage from the ever-shifting tariff policy. The conclusion is that the data streams were in the “same old” category despite all the noise of tariffs around us. Let’s check out two categories of data to see what is happening with prices and the American consumers.
The headline Consumer Price Index (CPI) rose 0.3% month-over-month and 2.7% year-over-year for June. The core CPI rose by 0.2% MoM and 2.9% on a YoY basis[1]. These numbers were below consensus expectations, so it seemed that the impact of tariffs so far has been muted, right? Well, it’s never that simple. Underneath the hood, we saw potential evidence of higher prices from tariffs, particularly in the “core goods” area like household furnishing that rely heavily on trade. But increases in the price of household goods were countered unexpectedly by decrease in the prices for transportation goods, like… cars, another trade-reliant item. If this inflation print taught us anything of value, it is that the economy is a very complex machine and that any type of forecasting is a humbling exercise!
I think it is important to take a moment to discuss inflation expectations in the context of this new tariff-based regime. And I say this because there is a lot of pressure in the industry to say that tariffs will cause inflation, so let me spell out my thoughts here. In theory, tariffs are not inflationary. Tariffs are a tax, and the price hikes are felt as a one-time change, like a “step-wise” function, for those who are mathematically inclined. You might even consider that tariffs can be disinflationary (falling inflation) if people balked at the suddenly high prices and stopped purchasing the goods. Sellers would have to reduce the underlying price of the goods, eating into their margin, and none of this would be good. That’s in theory. In practice, the answer to the question “are tariffs inflationary” is “it depends.” It depends on if higher goods prices translate into higher services prices. This would be significant because most of the U.S. economy is service-oriented. It also depends on whether the higher prices in goods pressure employers to pay more to their workforce to keep talent. That would translate to wage growth, which along with the service price hikes could fuel continuous price increases (instead of a one-time price hike). And that would be actual inflation. At this time, we don’t know how any of these factors will play out in the future, but I would watch the health of the labor market very closely in the coming months, as well as any non-tariff related “price hike contagion” into other areas of the economy. All of these serve as potential clues about the type of inflation regime that awaits us, what the Fed might do, and how that may change investing in the near term.
American consumers were also giving us signals during the month of June. Retail sales beat expectations by a wild margin during the month, coming in at 0.6% MoM and 3.9% YoY. From Q2 2024 to Q2 2025, retail sales rose 4.1%.[2] Apparently, you and I went shopping and ate out (it’s definitely true for me, sigh…). And these retail sales number came in strong perhaps because we felt good about the economy. The University of Michigan Consumer Sentiment Survey for June reflected a better mood than in May, painting a more upbeat backdrop for current conditions as well as expectations for the next six months. And how interesting that the survey showed a decreasing inflation expectation as the tariff negotiations continue! One-year inflation expectation fell to 4.4% from 5% in May, and five-year inflation expectation dropped to 3.6% from 4.0%. If positive sentiment continues to feed on the “animal spirits” of the U.S. economy, it would be good for withstanding the pressures from the tariff situation. It is also possible that inflation may stay elevated and above the Fed’s target of 2%. Again, I would be watching the labor market very closely for clues. Can this positive sentiment last or is it a summertime zeal?
In all, I should not have been surprised at the data releases last week. If there were to be seismic changes to any data set, it would happen very slowly because the U.S. economy is massive and also massively diverse. And if I have learned anything about economics and investing, it is never to bet against the American consumer!
[1] Bureau of Labor Statistics
[2] U.S. Census Bureau