Market-based inflation expectations have been observed, with hopes for a decline in short-term expectations over the summer. Commerzbank’s Michael Pfister questions the duration of the tariff-induced inflation shock and its transitory nature.

In July, tariffs were on average 6 percentage points lower than in April, with many US trading partners securing deals pegging tariffs at 15–20%. These changes suggest inflationary pressure, but the impact may be less than initially anticipated. The effects of these tariffs may dissipate from inflation calculations by the end of the year.

Inflation Data Dilemma

Since October, there has been a drop in inflation expectations for the coming year by just under 0.5 percentage points. The US government shutdown in October limited new data, affecting the reliability of inflation reports. As such, it’s uncertain how tariffs are impacting US prices.

The upcoming October inflation report might not be published due to incomplete data collection during the shutdown. The lack of new, reliable data hinders understanding of how tariffs affect inflation expectations, impacting USD purchasing power. The USD’s purchasing power loss may be temporary if the inflation shock proves transitory, underscoring the need to closely watch inflation expectations in the forthcoming months.

The data blackout from the October 2025 government shutdown means we are still operating with significant uncertainty. Key reports, like the October CPI, were never released, leaving a gap in our understanding of price pressures from the summer’s tariffs. As a result, market-based inflation expectations remain volatile, having fallen sharply in October but recently ticking up to 3.0% in the preliminary November consumer survey.

We know that the new tariffs, which came into effect in August 2025, were expected to create an inflation shock. However, with the subsequent data disruption, the market has defaulted to assuming this shock will be temporary. This belief is based more on the absence of contrary evidence than on solid proof.

Strategies Amidst Economic Uncertainty

The Federal Reserve is understandably hesitant to act, having signaled it will wait for reliable data to return before making any policy shifts. This inaction, while prudent, means USD investors are currently accepting a negative real yield, eroding their purchasing power. The longer this data uncertainty persists, the more risk is priced into the dollar.

This environment of high uncertainty is ideal for long volatility strategies. We should consider buying straddles or strangles on interest rate futures to profit from a large move in either direction once clear data emerges. These positions are relatively inexpensive now but could pay off significantly when the true inflation picture is revealed in the coming months.

Given the risk to the dollar’s purchasing power, we should also look at options on major currency pairs like EUR/USD. Buying out-of-the-money USD puts could be a cost-effective way to hedge against a scenario where inflation proves to be stickier than expected. Historically, periods of data uncertainty, like the aftermath of the 2013 shutdown, have led to sharp, unexpected currency moves once information flows resume.

Create your live VT Markets account and start trading now.