UBS expects inflation to impact the US economy in the fall. They forecast a core CPI increase of 0.35% month-over-month (m/m) and a year-over-year (y/y) rise of 3.11% in July. These are the highest estimates among analysts, with trends likely to strengthen as autumn approaches.

Tariffs and Core Inflation

Tariffs are expected to play a role, with core goods inflation predicted to reach 0.38% m/m after a 0.20% m/m rise in June. UBS anticipates further increases in the coming months: 0.60% in August, 0.76% in September, and 0.73% in October. Core services inflation is also projected to rise to 0.35% m/m in July, up from 0.25% m/m in June. Airfares and lodging prices are expected to rebound. Airfares dropped by 0.11% and lodging prices fell by 2.89% in June. UBS forecasts a 1.0% increase in airfares and a 0.90% rise in lodging prices away from home. Looking back to mid-2024, there were predictions of significant inflation growth heading into the fall. At that time, forecasts indicated rising core goods and services prices, driven by tariffs and increased travel costs. This created a tense market situation for the latter half of the year. Much of that forecast came true, with core inflation remaining high through the end of 2024. Official data shows Core CPI for October 2024 had a 0.5% month-over-month increase, delaying any changes from the Federal Reserve. We learned that price pressures can return quickly.

Interest Rate Futures and Market Volatility

The spike in inflation led the Fed to keep interest rates steady well into 2025, disappointing those hoping for quick rate cuts. There was notable volatility in interest rate futures as the market adjusted to a more hawkish outlook. This experience should guide our current market approach. Now, in mid-August 2025, we see a similar trend. The July CPI report showed year-over-year inflation rising to 3.4%, while the latest jobs report revealed the addition of 210,000 jobs. The Fed’s direction for the upcoming September meeting is again uncertain. Traders should consider purchasing protection against unexpected inflation news or a hawkish Fed. The VIX is currently around a relatively calm 15, making it an inexpensive option to buy call options against sudden market fear, especially since it surged over 20 during last autumn’s inflation surprise. Reviewing interest rate futures positions is wise, as the market may be overly relaxed about rates remaining high for a longer period. Traders could use SOFR futures to challenge the current expectations for rate cuts in early 2026, profiting if the Fed maintains a tight stance due to ongoing price pressures. We should also revisit themes from last year, such as services inflation. With summer travel demand in 2025 surpassing forecasts, airfare and hotel prices are rising again. Trading options on airline (JETS) or consumer discretionary (XLY) ETFs may be a good strategy to capitalize on this continuing inflation trend. Create your live VT Markets account and start trading now.

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