Market-based inflation expectations are changing, with hopes for lower short-term expectations this summer. Commerzbank’s Michael Pfister is questioning how long the inflation shock from tariffs will last and whether it is only temporary. In July, tariffs were about 6 percentage points lower than in April, as many US trade partners struck deals keeping tariffs between 15% and 20%. While these changes could raise inflation, the impact may not be as strong as expected. The effects of these tariffs might be gone from inflation calculations by the year’s end.

Inflation Data Dilemma

Since October, inflation expectations for the next year have dropped by nearly 0.5 percentage points. The US government shutdown in October limited the availability of new data, making inflation reports less reliable. This leaves us unsure about how tariffs are affecting US prices. The October inflation report might not be released because data collection was disrupted during the shutdown. The absence of reliable new data prevents us from fully understanding the effect of tariffs on inflation expectations, which affects the purchasing power of the USD. If the inflation shock turns out to be temporary, the loss in USD purchasing power may also be short-lived. It is crucial to monitor inflation expectations closely in the upcoming months. The data blackout caused by the October 2025 government shutdown means we are left with significant uncertainty. Important reports, such as the October CPI, were never released, missing valuable insight into price pressures from the summer tariffs. As a result, market-based inflation expectations remain unstable, dropping sharply in October but recently rising to 3.0% in the preliminary November consumer survey. We know that the new tariffs, which began in August 2025, were expected to cause an inflation shock. However, due to the data disruption, the market now assumes this shock will be short-lived, based more on a lack of contrary evidence than on solid proof.

Strategies Amidst Economic Uncertainty

The Federal Reserve is cautious and has indicated it will wait for reliable data before making any changes. While this is a careful approach, it means USD investors are experiencing a real yield loss, which erodes their purchasing power. The longer this uncertainty continues, the more risk is associated with the dollar. In this unstable environment, it might be a good idea to adopt long volatility strategies. We should think about buying straddles or strangles on interest rate futures to capitalize on significant market moves once clear data is available. These strategies are currently inexpensive but could yield impressive returns when the true inflation situation becomes clear in the next few months. Given the risks to the dollar’s purchasing power, we should also consider options on major currency pairs like EUR/USD. Purchasing out-of-the-money USD puts could be a smart way to protect against the possibility of inflation remaining higher than expected. Historically, times of data uncertainty, like after the 2013 shutdown, have led to sudden and surprising currency movements once new information resumes. Create your live VT Markets account and start trading now.

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