Bonds Breathe a Sign of Relief at Mild Tariff Data. What Could Change That.

Markets brushed off the 2.7% year-over-year rise in inflation reported earlier this week. (TIMOTHY A. CLARY/AFP via Getty Images)

A whiff of tariff inflation showed up in economic data this week, providing the first clues of how tariff policy might impact prices and the economy.

Signals from the bond market suggest tariffs are only having a mild impact on asset prices, strategists say. But that could change if inflation sets in more durably.

The consumer price index report for June, issued on Tuesday, showed indications that tariffs have raised some prices. Headline inflation rose in June to 2.7% year-over-year, up from 2.4% in May.

The bond market sold off on that report but steadied when wholesale prices, as measured by the producer price index, were reported Wednesday to be flat in June.

“The Fed will try to see this as transitory,” said John Briggs, head of U.S. rates strategy at Natixis Corporate and Investment Banking. Economists have long expected some price increases to appear in economic data.

“I think the question is how persistent is it? How high it goes is really going to be the question,” Briggs said.

For the bond market, the degree and duration of tariff-related inflation will be a critical factor determining the course of interest rates this year. It is also at the heart of President Donald Trump’s feud with Federal Reserve Chair Jerome Powell over the Fed’s interest rate policy.

Trump has called repeatedly on Powell to slash interest rates to reduce the interest on the government’s debt burden. The Fed chair, however, has maintained for months that the Fed needs to see how tariffs could impact inflation before lowering interest rates.

Trump has extended the deadline for many tariffs to take effect on Aug. 1. Many in the markets expect further extensions.

“When Trump delays tariffs, the risk markets cheer, but for the Fed it’s a two-sided coin. It just delays the point of certainty around what the tariff shock could be,” said Briggs.

Prices rose quickly on many consumer goods, which often have significant imported components. Excluding autos, core consumer goods inflation rose 0.6% from May to June, the highest reading since 2022.

Household furnishings and supplies rose 1% in June. Window and floor coverings and other linens jumped 4.2%. Appliances increased 1.9%. Apparel was up 0.4%, with men’s shirts and sweaters up more than 4% in the month. Prices for services, excluding energy, were up 0.3%. But some areas, such as airline tickets, were lower.

The Fed is likely to see the CPI data as confirming its theories that it is too early to determine tariffs’ effects on the economy, Pimco economists said in a note. “Higher tariff related goods inflation justifies their more cautious stance, while continued disinflation across services categories should support rate cuts in September and beyond,” the Pimco economists said.

Wholesale inflation, measured by the producer price index, was unchanged in June after a revision of 0.3% in May, though some tariff-related items showed gains.

Bank of America economists expect personal consumption expenditure—the Fed’s preferred inflation measure—to rise based on that report. They now expect PCE inflation will increase by 2.8% in June and that it could reach 3% in July.

“That would greatly reduce the likelihood of a September cut in our view,” they wrote in a note.

The bond market is signaling that it expects a one-time adjustment from tariffs that could play out over months, said Mike Cudzil, senior portfolio manager at Pimco. Inflation should then return to the Fed’s target inflation level, he said.

Many companies bought inventory ahead of tariffs. “How much of that has been run through and will we see continued increases in prices over the coming months?” Cudzil asked. “Our expectations are you will see a continued increase in prices.” But it may not be “as high as initially thought,” he said.

He added that some of the tariff impact may have been absorbed by suppliers and corporations who didn’t pass the full brunt on to consumers.

“The bond market is telling you inflation this year will be higher but not as high as once thought,” he said. Bond trading suggest that tariff price increases will be a “one time move won’t carry through in the years ahead. You can see that in the market for Treasury inflation-protected securities and other inflation swaps markets,” he said.

Cudzil said the Treasury market has consolidated in the last two to three months even with all of the tariff uncertainty. “The bond market has traded in essentially a 15-basis point range,” he said. The turmoil in headlines has produced a “storm in a teacup,” where prices are volatile, but only within a narrow range, he said.

He said the benchmark 10-year Treasury yield is attractive at 4.45%, where it was trading Wednesday. “You can just sit here and earn that yield and income.” And if the economy slows and the Fed cuts rates, bond-holders could see “double digit returns in fixed income,” he said.

Bond yields are holding at levels near key numbers, including 4.5% for the 10-year, and 5% for the 30-year.

“You’ve gotten through [June] inflation [data] and those important levels are hanging in. Yields are showing some signs of resilience,” Briggs said.

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