Written by the Market Insights Team
Canadian CPI show tariffs nudge June inflation amid uneven price shifts
June’s inflation data shows moderate upward pressure from tariffs, especially in furniture, clothing, and footwear. Still, the overall impact remains uneven. These effects may take time to fully materialize, as industries and supply chains gradually adjust to shifting global trade conditions.
So why haven’t inflation rates jumped more sharply? Many businesses are working through stockpiled inventories, while competitive pricing is helping to hold down costs. Also, rather than passing expenses on to consumers, some companies are choosing to absorb them in anticipation of new trade deals. The CUSMA agreement has also helped cushion the blow, keeping effective tariff rates well below the projected 35% starting August 1. As of now, the global average sits closer to 8%.
In June, Canada’s Consumer Price Index (CPI) rose 1.9% year-over-year, up from 1.7% in May. Monthly CPI increased by 0.1%, or 0.2% on a seasonally adjusted basis. CPI excluding energy climbed 2.7%, partly due to the end of consumer carbon pricing.
Here are the key category highlights:
- Energy: Gasoline prices dropped 13.4% year-over-year, a smaller decline than May’s 15.5%. Geopolitical tensions and changing refining margins helped ease the downward pressure from crude oil prices.
- Durable goods: Prices rose 2.7% compared to last year. Used vehicles reversed an 18-month downward trend, climbing 1.7%, while new vehicles increased 5.2%. Furniture surged 3.3%, but household appliances fell 0.4%, undoing May’s 2.6% gain.
- Clothing and footwear: Prices increased 2.0% year-over-year, significantly higher than the 0.5% rise in May. The stabilization in women’s clothing and added trade uncertainty contributed to the growth, with retailers facing higher import costs.
- Food: Grocery prices rose 2.8% annually, slowing from May’s 3.3%. A steep drop in fresh vegetables led the deceleration, onions were down 10.3% and cucumbers fell 18.3%, marking the first annual produce price decline since October 2021.
Also, the share of CPI basket components rising at 3% or more climbed to 39.1% in June, up from 37.3% in May, signaling broader inflationary pressure. In response, futures markets have scaled back expectations, now anticipating no additional rate cuts from the Bank of Canada for the rest of 2025. The two-year yield spiked to 2.8%, its highest since January, as tariffs are expected to become more prominent in upcoming CPI prints, likely keeping core inflation above the 3% threshold.
The USD/CAD jumped higher, as the inflation report in the US reflected a similar story, where disinflationary forces persist but a slight uptick in goods inflation grabbed headlines. As a result, the odds of a September rate cut by the Federal Reserve have also declined, strengthening the U.S. dollar and limiting further gains for the Canadian dollar, which remains just above 1.37.
US CPI flatters to deceive
The US dollar initially weakened following yesterday’s inflation print but ultimately extended its winning streak to a seventh straight session as Treasury yields climbed sharply — with 30-year rates breaching the 5% mark. The course correction occurred because although the headline figures largely aligned with forecasts, underlying data pointed to broadening price pressures across key categories, challenging the notion that inflation is cooling. Investors appeared to underestimate the stickiness beneath the surface, before recalibrating as rate expectations shifted.
On the surface, the CPI report appeared benign. The annual inflation rate in the US accelerated to 2.7% in June, up from 2.4% in May and in line with expectations. On a monthly basis, the CPI edged up 0.3%, marking the largest increase in five months, also matching expectations. Meanwhile, monthly core CPI rose less than anticipated by 0.2%, the 5th consecutive negative surprise, and the annual rate ticked up to 2.9% as expected. Risk assets initially rose, Treasury yields fell, and the dollar dropped but these trends were short-lived as the data didn’t provide conclusive evidence that the Fed should accelerate rate cuts.
Under the hood, broad-based price pressures have been quietly gaining traction. For the first time since February, all major inflation components – core goods, core services, food, and energy – rose m/m, underscoring the risk that inflation may not be as contained as it appears. In fact, excluding cars, core goods prices climbed 0.55% in June – the biggest monthly advance since November 2021 – driven particularly by tariff-impacted categories like electronics and apparel, suggesting companies are starting to pass higher import costs on to consumers.
Tariff pressures are also apparent in the New York Fed’s Supply Chain Pressure Index, which leads the San Francisco Fed’s measure of supply-driven inflation, which has ticked higher too. Meanwhile, price pressures are rising in other areas as well, such as industrial metals, freight prices and food prices.
All of this suggests that the Fed’s fight against inflation is far from over, hence the probability of a cut in September has dropped from over 90% at the start of the month to around 50% today. This complicates the short-term picture for the US dollar. If inflationary pressures prove persistent, the Fed may need to delay cuts or opt for a lighter easing cycle – a scenario that could lend USD tactical support, especially against currencies from more dovish central banks. That said, positioning remains skewed toward structural USD shorts, reflecting longer-term expectations of slowing US growth and a shrinking yield advantage.
Euro in free fall
The euro tumbled against the dollar yesterday: after breaching support at $1.1660, there was nothing meaningful to hold it until just below the $1.16 mark. EUR/USD hovered close to a 3-week low at $1.1590. Three converging factors point to a bearish outlook for the euro in the short- to medium-term.
First, the latest US CPI release gave the dollar a notable lift. The month-over-month headline figure met expectations at 0.3%, but those expectations had already priced in a highly anticipated tariff-induced summer bump (up from 0.1% in May). Confirming that figure was enough to snuff out any lingering hopes of a summer rate cut. Especially given that tariff uncertainty is still ongoing and negotiations still unresolved, the Fed is more likely than ever to remain on the sidelines for the next few months. This locks in wider rate differentials in favour of the dollar.
Second, and this is more sentiment-related, persistent tariff tensions are expected to continue boosting the dollar, underpinned by the prevailing view that the ultimate tariff impact will be milder than feared.
And that makes two out of three.
The final factor — US. macro data—may be the euro’s last shot at regaining traction. Should signs emerge that the US economy is cooling due to tariffs, the elevated inflation seen in June could take on a more malign character, stoking fears of stagflation and potentially triggering renewed dollar selloffs. Tomorrow’s industrial production, and Thursday’s retail sales figures for the US will be the next key test.
For now, expect EUR/USD to remain under pressure. If the $1.16 support is decisively breached, the next level to watch is $1.1450—suggesting further room for euro free falling.
USD/MXN tests key short-term resistance level
The USD/MXN surged close to 18.90, its highest level in July, after hovering close to its strongest valuation in nearly a year. Most emerging-market currencies declined Tuesday under pressure from a strengthening dollar, as traders reassessed the Federal Reserve’s rate trajectory and the potential inflationary impact of President Trump’s trade war. Although markets have largely shrugged off Trump’s threat to impose 30% tariffs on Mexican and European goods, it still presents downside risks for the Peso and broader Latin American currencies.
Supportive of the Peso’s recent path, has been the minutes from the Bank of Mexico’s June meeting, which indicated that, following a cumulative 325 basis-point cut since early 2024, the room for further aggressive easing is limited. While additional cuts remain on the table, the central bank now favors more measured adjustments of 25 basis points, given inflation’s persistence above target.
Stagflation risks haunt sterling
The balance of risks for sterling is tilting further to the downside against the USD and EUR with domestic vulnerabilities increasingly outweighing lingering yield support. This morning’s hotter-than-expected UK inflation data has offered some modest reprieve for the pound, but it could be fleeting given its potential for stoking stagflation concerns, especially as growth sputters.
UK inflation unexpectedly rose to 3.6% in June, its highest level since January 2024 and above the expected and previous print of 3.4%. The pace of price rises was pushed up mostly by food and energy prices. But core inflation, which strips out these volatile components, also beat forecasts, while services inflation — a sign of domestic pressures being watched closely by the Bank of England (BoE) — held at 4.7%, higher than expected.
The latest developments present a challenge for the BoE, which is seeking clearer signs that inflationary pressures are subsiding in tandem with slowing economic growth to justify a rate cut in August. Money markets have trimmed rate cutting expectations for this year after today’s data, but Governor Andrew Bailey has indicated that further easing is on the horizon. He recently cited notable declines in employment following recent fiscal changes under the Labour government — including increased payroll taxes and an April minimum wage hike. As such, market attention turns to the official jobs report due tomorrow, which may prove pivotal in shaping the BoE’s near-term policy path.
As for the pound, despite the uptick this morning, GBP/USD is on track for third weekly decline in a row, down over 2% already this month. The currency pair is still in an uptrend this year since hitting a low of $1.21 in January, but the 21-day moving average is pointing lower in a sign that the pair is exposed to a deeper pullback. The 100-day moving average at $1.3267 is a potential target to the downside, which could confirm an end to the 2025 uptrend.
US dollar and yields topping recent ranges
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Key global risk events
Calendar: July 14-18
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
