Inflation Jumpy, Tariffs Impact CPI & PPI: What It Means for Fed Rate Cut Expectations

Markets have been quick to price in three Fed rate cuts for this year and another three for next year, largely based on last Friday's jobs report. However, this week is all about inflation, with the release of the latest Consumer Price Index (CPI) and Producer Price Index (PPI) reports. These reports will provide a much clearer picture of the real economic landscape, which has recently shown signs of accelerating inflation.

Why This Week's Inflation Reports Are Different

The recent data carries extra weight due to a significant factor: tariffs. On August 1st, a new round of tariffs was officially set after a period of uncertainty. While previous inflation prints, despite some tariffs, didn't show the price "pass-through" that the Federal Reserve had been concerned about, that's likely to change.

Until now, businesses were hesitant to raise prices and risk alienating customers, but the recent finalization of tariffs may have given them the confidence to pass on these higher costs. This pass-through effect is likely to begin showing up in this week's CPI and PPI numbers.

Looking Ahead: Upside Risk for Future Inflation

The inflation reports this week will not only reflect the initial impact of the new tariffs but also the early stages of businesses passing those costs on to consumers. This suggests that inflation reports in the coming months could have even more upside risk, as the full effects of the tariff pass-through become more widespread.

The Tariff Court Ruling: What's Next?

The legal battle over the tariffs adds another layer of complexity. An appellate court recently ruled the tariffs illegal but allowed them to remain in effect until October 14th. The White House has quickly requested that the Supreme Court overturn this verdict.

Given the Supreme Court's current composition and its history of rulings on similar matters, it's highly probable that the court will side with the White House. This would mean there is no end in sight to the "set" tariffs, which would likely reinforce businesses' comfort in continuing to pass these costs on to customers.

The Big Picture: Jobs vs. Inflation

While Friday's jobs report grabbed the headlines, it's only one piece of the puzzle. The Fed's dual mandate is focused on both employment and stable prices. This week, inflation takes center stage.

If the upcoming CPI and PPI reports show that inflation is printing high or higher than expected, it will challenge the market's current expectations for rate cuts. I believe the aggressive rate cut bets that jumped last week could quickly reverse and normalize in light of strong inflation data.

The Bottom Line: Expect Volatility

The market is currently betting on one outcome, but the data this week could tell a very different story.

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