While the tariffs theme continues to rumble away in the background, this week has been all about the economic data and trying to decipher whether the tariffs are showing up in the US inflation data, and the consequences for US interest rates as a result.
Inevitably there was more tariff news for financial markets to digest, and generally ignore. President Trump announced last weekend that he would impose 30% tariffs on the European Union (EU) and Mexico effective from the start of August. With talks between the EU and US ongoing – and thought to be making progress – this announcement saw little reaction in markets, with the consensus view being that the EU would still be able to agree a framework tariff agreement, at a lower level, by the end of this month. European Commission President Ursula von der Leyen said “imposing 30 per cent tariffs on EU exports would disrupt essential transatlantic supply chains, to the detriment of businesses, consumers and patients on both sides of the Atlantic”. Von der Leyen noted the EU had “consistently prioritised a negotiated solution” and was “ready to continue working towards an agreement by August 1”. She added that the EU would not impose retaliatory tariffs on the US before August 1st.
President Trump made clear on Monday that he was still open to talks after setting out tariffs for many of the US’s trading partners over recent weeks. Trump said “the letters are the deal. The deals are made. There are no deals to make”. However, Trump commented Europe “would like to do a different kind of deal. We’re always open to talk, including to Europe. In fact, they’re coming over; they’d like to talk”. EU chief trade negotiator Maros Sefcovic said Trump’s proposed duties were “effectively prohibitive” to transatlantic trade and could warrant retaliation. Sefcovic said “the current uncertainty caused by unjustified tariffs cannot persist indefinitely… therefore we must prepare for all outcomes, including – if necessary – well considered, proportionate countermeasures to restore the balance in our transatlantic relationship”. Other than China and Canada, we are yet to see countries retaliate against the US tariffs; that may well change if Trump sticks to the levels proposed and the tariffs kick in on August 1st at the levels the US has set out. The pushing back of deadlines and rapprochement with China has helped avoid the worst of the potential escalatory trade war scenarios, but they cannot be ruled out completely once countries finally learn of the longer-term tariff rates the US has chosen for them. The US effective tariff rate – the average rate charged on imports – has varied between 2.5% and 26.5% so far this year, after decades below 5%. Where we end up on this wide scale, and any retaliation that follows, will have a significant role in determining the impact on the US economy going forwards.
The economic data this week has been headlined by the latest US inflation data, which showed CPI in June accelerating to 2.7% year on year – higher than expected and up from 2.4% in May. Core inflation was 2.9%, below expectations for the fifth consecutive month. Within the data there were some signs of upwards pressures from tariffs – household furnishings rose by 1% month on month (MoM), and toy prices were up 1.8% MoM having been up 1.3% MoM in May. Household appliance prices rose 1.9% MoM, the largest monthly increase on record. The data certainly hints at tariffs beginning to have an impact on the overall data, though this is offset by falling housing costs which have a significant impact on core CPI given that the ‘shelter’ component in the CPI basket has a weighting of almost 40%.
While US inflation remains relatively benign, it appears to be settling some way above the Federal Reserve’s 2% target, and the near-term risks remain to the upside. For now, US companies are cushioning the impact on consumers from the full impact of tariffs, and many have said they are waiting to see where tariff levels settle before considering price hikes. Companies have some flexibility in this respect thanks to imports stockpiled earlier in the year. But once these stockpiles are used up, higher costs will need to be passed on, or company margins will suffer the consequences. The data will leave the Federal Reserve comfortable in ‘wait and see’ mode for July and August’s CPI prints ahead of the next rate setting meeting on 17 September. By then the Fed should have more insight into the inflation pass through from tariffs and also have more data on the softening labour market. Inflation may well be headed for 3% but given their dual mandate, the Fed may well still feel the need to cut interest rates later this year. President Trump once again called for sizeable rate cuts, posting on social media “the Fed should cut Rates by 3 Points. Very Low Inflation. One Trillion Dollars a year would be saved!!!”. Markets briefly wobbled on Wednesday as news broke that Trump had discussed sacking Powell with Congressional Republicans, one of which took to social media to claim Powell’s dismissal was “imminent”. An hour after the news broke, causing spikes in yields and a slump in the US dollar, Trump told reporters in the White House it was “highly unlikely” he would imminently fire the Fed Chair but didn’t rule it out, calling Powell a “knucklehead”. Trump said “we’re not planning on doing anything…. I don’t rule out anything but I think it’s highly unlikely, unless he has to leave for fraud, and it’s possible there’s fraud”. This is a reference to the ‘scandal’ some Republicans are pushing over the escalating costs of the refurbishment of the Federal Reserve building in Washington. Clearly Trump wants Powell out, but he remains hesitant to fire him. The political theatre continues but any perception of loss of independence at the Fed will not go down well in bonds and the dollar. Equities will likely ultimately find the positives in the potential for lower rates under a more Trump-leaning Fed Chair. Markets are now pricing just under two rate cuts, a total of 43 basis points, for this year. As recently as April, markets were pricing 100 basis points of rate cuts this year.
In the UK, the inflation and employment data for June was published. The inflation data surprised to the upside, with CPI at 3.6% year on year, an 18-month high. The biggest driver of the upside surprise to inflation was petrol prices, with increases in air fares, rail fares and repair of transport equipment also contributing. Services inflation was expected to ease but remained unchanged at 4.7% year on year. The CPI data is still expected to ease later in the year thanks to base effects but the stickiness in the services data won’t sit too easily with the Bank of England. Earlier in the week, Governor Andrew Bailey said, “I really do believe the path is downward” on interest rates, adding “we continue to use the words ‘gradual and careful’ because some people say to me ‘why are you cutting when inflation’s above target?’”. Bailey said the UK economy was growing behind its potential and that the “slack” in the economy would help to lower inflation. The unemployment rate ticked up to 4.7% but and payroll numbers continued to decline, though not quite as badly as previously seen, with May’s initially reported decline of 109,000 payrolls revised to a decline of 25,000. June saw a further decline, reported at 41,000 but potentially subject to further revision. The slightly less bad data points to a weakening labour market, but not one in precipitous decline.
China also published their monthly ‘data dump’ this week, along with second quarter GDP data which showed growth to be 5.2%, slightly above expectations but lower than Q1’s growth of 5.4%. Industrial production for June was up 6.8% year on year, ahead of expectations, but retail sales disappointed, up 4.8%. Property investment remained soft, down 11.2% year on year. Trade data was encouraging, despite a 24% slump in exports to the US in the second quarter, overall exports for the first half of 2025 were up 5.8% and with a record trade surplus of $586 billion. This suggests China is managing to find alternative sources for export income, but the question remains is how much discounting is being needed to sell these goods and whether China has begun exporting deflation overseas. Weak consumer confidence remains a concern, and retail sales may soften further as the governments successful ‘trade-in’ policies that have boosted sales of household appliances passes its peak. The government appears on track for the ‘around 5%’ growth target this year, but there is still work to be done in restoring consumer confidence and ensuring recent deflationary pressures do not persist.
Have a good weekend. Enjoy the sunshine, the Lions vs Australia and the Tour de France.
Source: Columbia Threadneedle Investments as at 18 July 2025.
