Economists at CIBC reviewed the August CPI report and noted a slight rise in inflation. However, this increase is not likely to stop the Federal Open Market Committee from cutting rates by 25 basis points. Core inflation stayed the same at 3.1% annually, while the overall inflation rose to 2.9%. There are worries about rising prices, especially for core goods because of tariff impacts.

Impact Of Tariffs

Prices for new cars increased significantly, showing how tariffs affect larger purchases. CIBC forecasts that the Federal Reserve will lower rates in September and October, then pause. Market expectations suggest a total of 121 basis points in rate cuts by June 2026. Overall US inflation remains below the target, giving the Fed some leeway as concerns about the economy and job market continue. If there weren’t strong resistance to reducing rates, the Federal Reserve might take a more gradual approach. The next Fed meeting is on September 17. We should prepare for the anticipated 25 basis point rate cut on September 17, likely using interest rate futures. The latest JOLTS report from August revealed job openings dropped below 9 million for the first time since early 2023, providing the Fed with a reason to ease. This suggests that rates are likely to head lower soon.

Price Pressures And Easing Concerns

However, the growing price pressures from tariffs add a lot of uncertainty for the upcoming months. We saw this trend during 2018-2019, when tariffs led to a slow but steady increase in consumer prices after a brief delay. This indicates that we should consider positions in inflation swaps to protect against the risk of inflation staying higher than the Fed expects. This situation, where the central bank is easing policy amid 3.1% core inflation, can lead to increased market volatility. With the VIX index low at around 14.5, options pricing may not fully account for the chance of sudden market movements. Buying VIX calls or using options straddles on major indices could be a smart move to take advantage of this divergence. Looking ahead, the market expects over 120 basis points of cuts through the middle of 2026. If inflation from tariff-affected items like cars proves more stubborn, this aggressive easing plan might be questioned later next year. This could open opportunities in longer-dated SOFR options, betting that the total number of cuts will be fewer than currently anticipated. Create your live VT Markets account and start trading now.

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