The latest U.S. core PCE inflation data shows a 0.26% increase in June. This is close to PIMCO’s forecast of 0.25% and slightly below what the market expected at 0.3%. The annual inflation rate remains at 2.8%, which is above the Federal Reserve’s target of 2% but still considered manageable. PIMCO warns that if month-over-month growth reaches 0.3%, it may signal changes in inflation trends, with tariffs starting to impact consumer prices. Some companies that previously absorbed added costs are now passing these on to customers, leading to a rise in durable goods inflation.

Durable Goods Inflation and Supply Chains

Durable goods are closely linked to global supply chains and are especially affected by tariffs. PIMCO notes an uptick in durable goods inflation on a six-month annualized basis, which raises concerns about the overall inflation path. PIMCO is a significant player in the global bond market, managing over $1.8 trillion in assets. Their insights are influential due to their in-depth research and impact on financial markets globally. The June 2025 inflation data was largely as expected, but the annual rate remains steady at 2.8%, well above the Fed’s target. Ongoing price pressures complicate the discussions around rate cuts from some members of the Fed board. It’s now important to dig deeper for signs of where inflation might be headed. A crucial point is the rising pressure on durable goods prices, which are significantly influenced by global trade and tariffs. Many companies initially absorbed these costs, but they are now beginning to pass them on to consumers. This could indicate the start of a new phase of inflation, driven by supply chain issues rather than only demand factors.

Implications for Interest Rates and Market Volatility

This situation complicates the case for anticipated rate cuts. The data suggests that the Federal Reserve may need to keep rates higher for a longer period to tackle this new inflation challenge. This mismatch between market expectations and economic reality may lead to trading opportunities in the coming weeks. Looking back to the 2018-2019 trade disputes, we saw tariffs on goods like washing machines cause price increases of over 12% in just one year. Recent data from the Bureau of Labor Statistics shows a 4% rise in import prices for consumer electronics through the second quarter of 2025. History suggests we should take the signal from durable goods seriously. For those trading interest rates, it’s wise to reevaluate positions that expect aggressive rate cuts. The current pricing in the Secured Overnight Financing Rate (SOFR) futures market may be too optimistic, presenting an opportunity to bet on fewer rate cuts for the rest of 2025. This is further supported by the 2-year Treasury yield, which has remained around 4.5%, despite discussions about rate cuts. This environment also suggests a potential rise in market volatility. If inflation remains high and the Fed delays rate cuts, stock market sentiment could quickly worsen, especially in sectors sensitive to interest rates. Considering protection through VIX options or puts on the Nasdaq 100 index could be a smart move as we approach August. We should recall the inflation surge of 2021-2022, which was initially thought to be “transitory” but ended up being lasting. The early signs we’re seeing in durable goods inflation seem familiar. Thus, assuming a smooth return to 2% inflation may be risky from a trading perspective. Create your live VT Markets account and start trading now.

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