Weekly Update 06/13/2025: Inflation Readings Subdued Before Fed Meeting
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Inflation
The consumer price index (CPI) rose 2.8% in May from a year ago, excluding food and energy items, according to data from the Bureau of Labor Statistics (BLS). Goods prices, again excluding energy and food, were unchanged reflecting lower apparel and used-car prices. Including all items, CPI rose 2.4%, which was inline with estimates in a Bloomberg survey of economists. The preferred target for the Federal Reserve is an annual increase of 2.0% so the latest figures are close to hitting their mark. However, the uncertain prospect of tariffs is creating a high level of ambiguity. A rise in goods prices in the months ahead could become a reality if negotiations between the U.S. and its trading partners go poorly. Prices of toys rose by the most since 2023 last month, and the costs of major appliances registered the largest advance in almost five years. A note from the Bloomberg economic team is insightful: “It’s not that firms haven’t passed on tariffs — they have, with the report showing brisk pass-through of tariff costs for items most exposed to imports from China. But deflation in recreational-services items, and in durable goods such as cars — tell-tale signs of consumer caution and insecurity about their future income prospects — more than offset the tariff pass-through.”
The producer price index (PPI) rose 0.1% in May according to the BLS. That was below the 0.2% estimate in a Bloomberg survey of economists. Excluding food and energy, the monthly change was also 0.1%, coming in below the 0.3% expected. On an annual basis, the headline and core readings were 2.6% and 3.0%, respectively. Similar to CPI, this is another month of tame inflation. But also similar to the consumer index, economists predict price pressures will build in the second half of the year. Goods prices excluding food and energy rose 0.2% while services prices rose 0.1%. A key factor in how prices will behave is linked to international trade which we discuss below.
Trade talk
Representatives of the U.S. and China met in London this week to discuss a potential trade truce. The framework agreed to would essentially restore the pact both parties agreed to in Switzerland last month when a 90-day pause on higher levies was put in place. “The two largest economies in the world have reached a handshake for a framework,” Commerce Secretary Howard Lutnick said in London. “We’re going to start to implement that framework upon the approval of President Trump, and the Chinese will get their President Xi’s approval, and that’s the process.” The biggest items to discuss were loosening of Beijing’s restrictions on rare-earth products, which are crucial to car production in particular, and the U.S. loosening restrictions on the sale of key technology to China including chip-design software and jet engine manufacturing. While having a framework in place is a significant positive to the markets, it is a bit premature to unfold the “mission accomplished” banner. The two sides simply have little political trust in one another. For example, China is placing a six-month limit on rare-earth export licenses which gives Beijing leverage if trade tensions flare up again. The escalate/de-escalate methodology has investors dizzy from the various salvos. Markets, so far, are seeing the glass as half-full given that talks are indeed taking place whereas it seemed less than a few weeks ago negotiations were keeling off the rails. In testimony on Capitol Hill, Treasury Secretary Scott Bessent said that an extended 90-day pause on reciprocal tariffs may be extended to some trading partners that are viewed as negotiating in good faith. Nearly daily headlines about new levies or progress on others will keep market volatility high likely through the summer.
Labor
Initial unemployment claims from the Labor Department were released on Thursday. For the week ended June 7, the figure was an increase of 248,000, slightly above the 242,000 reported last week. Claims rose most in California, Minnesota and Pennsylvania. The focus for investors, however, was on continuing unemployment claims which rose 54,000 in the week ending May 31. This suggest that employers, unsure of the tariff environment, are being cautious about hiring making it difficult for those who lose jobs to find new ones. Summer can be extra volatile for data given the number of holidays (Memorial Day, Juneteenth and Independence Day) in a relatively short period of time. Traders, nonetheless, will be focused on the weekly reports because they are timelier than the monthly payroll data which is often revised at a later date anyways. The Federal Reserve’s next Federal Open Market Committee meeting, where monetary rates will be set, is scheduled for next week with a decision due by 2:00pm ET on Wednesday, June 18, followed by a Q&A session with Chairman Powell at 2:30pm. Futures markets are predicting no change at either next week’s confab or the one following on July 30. Two rate cuts of 25 basis points (0.25%) each are priced into the bond yield curve, but that can change as new information becomes available. While there is building pressure on a labor force that seems to be running out of steam in terms of hiring, with unemployment holding steady in the low 4% range and inflation currently subdued, there is no reason for the Fed to act. In the words of the famed investor Warren Buffett: “The trick is, when there’s nothing to do, do nothing.” While that is meant as reference to waiting for the “fat pitch” before investing in stocks, it can serve as a helpful bromide for not rocking the boat when the waters appear calm.
Company Events
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