If CPI inflation jumps, US Market tumbles ?
The consumer price index (CPI) for June 2025 will officially be released on Tue, 15 Jul 2025 morning; just before US stock market resumes trading.
Forecasts so far are pointing to a 2nd month of rise following May 2025 CPI data released a month earlier.
CPI forecasts.
(1) Federal Reserves Bank of Cleveland.
The regional Reserves Bank, has forecast a rise in June 2025 CPI. (see above)
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Headline inflation (YoY) will be 2.64 vs May 2024’s 2.4%.
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Core inflation (YoY) will rise to 2.95 vs May 2024’s 2.8%.
(2) Financial information & Data company.
Bloomberg consensus forecast is:
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CPI rise to 2.7% in June, up from a 2.4% increase in May.
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Core CPI rises to 3% over the year, up from 2.8% in May.
Comparison.
Looking at above 2 sets of estimates, it is evident that Bloomberg has a more “bearish” set of inflation numbers:
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Headline inflation is a tad (+0.06%) more pessimistic than the Res. bank of Cleveland forecast.
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Core inflation (exclude food & energy) is the more ‘aggressive’ number, coming in at +0.05% more that Cleveland bank’s. And it also reached the 3% level, a reading not seen since 12 Mar 2025.
What if CPI Inflation number rises ?
If US CPI inflation rises higher for June 2025, the immediate reaction in the US stock market is likely to be negative.
Historically, a higher-than-expected inflation reading tends to:
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Increase expectations that the Federal Reserve will delay or avoid interest rate cuts, as persistent inflation pressures the Fed to maintain a tighter monetary policy stance.
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Weigh on equity valuations, especially for growth & technology stocks, as higher rates reduce (a) the present value of future earnings and (b) raise borrowing costs.
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Heighten market volatility, as rational investors would likely (1) reassess risk and (2) adjust portfolios in anticipation of a more hawkish Fed.
US Treasury Yields.
Historically also, when CPI inflation rises, US Treasury yields often increase as well, but the relationship is not perfectly one-to-one or immediate.
The main reason is higher inflation typically :
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Leads investors to demand higher yields to compensate for the loss of purchasing power.
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Raises expectations that the Federal Reserve may increase interest rates to control inflation, when inflation is beyond a certain quantum.
Case in point.
According to T. Rowe Price, inflation expectations and headline CPI started to rise in late 2024 and early 2025.
This was partly due to concerns about tariffs and policy.
As a result, US 10-year Treasury yield increased sharply. It moved from 0.51% in August 2020 to a peak of 4.79% on 14 Jan 2025. (see below)
The rise was specifically linked to (a) "sticky” inflation, (b) ballooning budget deficits, and (c) political uncertainty.
The break-even inflation rate (a market measure of inflation expectations) also rose during this period, reinforcing that yields increased in response to rising inflation pressures.
Recent context shows that investors have been closely watching the June CPI data for signs of tariff-driven price increases and their potential to push inflation above the Fed’s comfort zone.
If the CPI comes in above expectations, it reinforces the view that the Fed will remain cautious and delay rate cuts, that typically puts downward pressure on stocks.
Actual market reaction could be influenced by other factors as well.
This includes:
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Whether the inflation surprise is large or small relative to consensus forecasts.
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US market’s prior positioning & sentiment, as equities have recently reached record highs despite tariff concerns.
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Ongoing earnings reports and other macroeconomic data releases.
Whatever the case maybe, should inflation rises, as an investor would you (i) run forward and scoop up wish list stock/s OR (ii) sell-off and run for the hills ? A true litmus-test of an investor’s tenacity & conviction.
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Do you think June 2025 will be the start of US inflation rising higher than 3% all over again ?
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Do you think US market will start to pullback OR ignore inflation pressure and cont’d to rise ?
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