July 2025 CPI Preview
CPI unlikely to move markets unless we see major tariff pass-through effects
Summary: The sharp rise in customs revenue is proof that tariffs are indeed being paid, but the distribution remains largely unknown. Consumers have likely paid some of the tariffs in the form of higher consumer prices, specifically for household items like appliances. This may broaden to a wider array of goods in July with import prices of Chinese goods swinging into positive growth territory, indicating that Chinese exporters are starting to bear less of the burden. However, weakening consumer demand, evidenced by poor personal spending growth in the first half of the year, reduces the pricing power of businesses and their ability to pass these costs onto consumers. Overall profit margins in Q2 will partially reflect this, though excess inventory buildup in the months before big tariff announcements has helped shield businesses and consumers from some of these price effects, for now.
Market Implication: After the multi-sigma move post the July NFP, markets are anxiously awaiting the latest readings on CPI. Upon reviewing the major CPI and NFP releases that moved markets since the pandemic, it’s not typical to see outsized moves happen so consecutively. Furthermore, when reviewing the 2yr daily change, the average over the past year moved in absolute terms twice as large on NFP days (avg 12bps) compared to CPI days (avg 6bps). The focus will remain on core goods that are impacted by tariffs. With expectations for a 0.2 headline and 0.3 core, a 0.2/0.2 would elicit a rally in rates (however we doubt that the 2yr rate would go to the NFP low of anywhere near 3.65%). Conversely a 0.2/0.4 (rounded up core print) would see a bigger rates sell-off.
