June Inflation May Be Hiding A Nasty Surprise For Wall Street

After relatively benign inflation reports throughout 2025, the June Consumer Price Index could deliver what Wall Street least expects: the return of hotter price pressures, largely fueled by tariffs. For markets riding all-time highs, this could mean more pain than gain.

Here's what to expect on Tuesday at 8:30 a.m. ET, when the Bureau of Labor Statistics releases the much-anticipated June inflation report.

A Sharp Inflation Acceleration Is On Deck

Economists anticipate the headline inflation rate to climb from 2.4% in May to 2.7% in June—the highest since January and a pace of acceleration unseen since late 2023.

On a monthly basis, the CPI is expected to rise 0.3%, up from 0.1% in May, marking the fastest monthly increase of the year.

But this isn't a story driven by energy or other volatile components. The core Consumer Price Index—which strips out food and energy and better reflects underlying inflation trends—is also expected to reheat.

Forecasts indicate an annual increase from 2.8% to 3%, accompanied by a monthly gain of 0.3%, marking the end of a three-month period of stability.

"Core goods is the main driver of our expected acceleration in core CPI inflation," said Bank of America economist Stephen Juneau in a recent note to clients. The expert sees broad-based price hikes extending beyond used cars, partly due to newly imposed tariffs.

Markets Are Complacent—And That’s The Problem

Despite mounting signs of upward pressure, traders remain largely unfazed.

Both the S&P 500 and Nasdaq 100 indices continue to push record highs, and market-based inflation expectations—measured by breakeven rates—remain steady around 2.4% for both 5- and 10-year horizons.

That calm is echoed on Kalshi, the CFTC-regulated prediction market, where traders assign just an 8% chance that June's annual inflation tops 2.7%. In other words, betting on a surprise costs pennies and could pay ninefold.

Such confidence—or overconfidence—sets the stage for potential market disarray should the data come in hot.

What Are The Key Drivers Of Inflation?

Tariffs are front and center.

Glen Smith, chief investment officer at GDS Wealth Management, said June's CPI "is likely the first inflation report that noticeably reflects higher prices from tariffs," and cautioned that strong inflation could delay any Federal Reserve action on rate cuts.

Bank of America's Juneau noted additional pressure coming from discretionary services like lodging and airfare, which had previously shown deflation but are now expected to rebound. Medical services and shelter costs are also forecast to contribute more than they did in May.

Goldman Sachs' Jessica Rindels sees a slightly cooler core CPI print of 0.23% for June, but said, "tariffs will likely provide a somewhat larger boost to monthly inflation," expecting core inflation to trend between 0.3% and 0.4% in the coming months.

What It Means For Markets

The implications for monetary policy are significant. As of now, futures markets imply a 93% chance the Federal Reserve will cut interest rates twice before year-end, totaling 50 basis points.

But a strong CPI print could change that overnight. If price pressures resurface more broadly, the Fed could remain on hold for longer, delaying relief for borrowers and possibly tightening financial conditions.

For equity markets, a stronger-than-expected inflation reading could slam the brakes on the rally that has pushed the Vanguard S&P 500 ETF VOO up 30% from April lows, with stocks trading at record highs under the assumption that Donald Trump's tariffs won't disrupt growth.

At the same time, it could hand a much-needed boost to the U.S. dollar. The U.S. Dollar Index remains down 9% year-to-date, yet positioning among investors is heavily bullish. Hotter inflation could validate those bets, as markets would likely dial back expectations for Fed rate cuts in 2025.

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