Several measures of U.S. inflation showed signs of increasing in June, complicating the decision-making process for the Federal Reserve regarding potential interest rate cuts. The Dallas Fed’s trimmed mean PCE, excluding extreme price movements, rose 3.4% annualised in June and increased 2.7% year-over-year, slightly higher than previous months.
The Cleveland Fed’s median PCE also accelerated, reaching a 3.6% annualised rate, up from 2.5% in May. Its 12-month increase was 3.15%, slightly above the previous month’s 3%. A third gauge, the market-based core PCE index, excluding certain imputed prices, increased 0.29% in June with a 2.6% year-over-year rise, the highest since March 2024.
Firmer Inflation Readings
These firmer inflation readings across alternative metrics indicate persistent underlying price pressures beyond what headline data shows. This trend is expected to be scrutinised by the Federal Reserve in upcoming meetings.
The Federal Reserve is watching where inflation is going, and the data from last month shows us why they are holding off on rate cuts. We now see that the Dallas and Cleveland Fed’s alternative inflation reports for June were hotter than expected. This tells us that underlying price pressures are more stubborn than many believed.
This sticky inflation is happening alongside a surprisingly strong jobs market, giving the Fed no reason to rush. The latest report for July 2025 showed the unemployment rate holding firm at 4.0%, with payrolls continuing to expand. This combination of factors strongly supports a “higher for longer” interest rate policy.
Market Implications
Traders should therefore re-evaluate bets on imminent rate cuts by looking at interest rate derivatives. The market has been pricing in cuts for later this year, but that now seems unlikely. This presents an opportunity in SOFR futures for those positioning for rates to remain elevated through the end of 2025 and into early 2026.
This environment is a headwind for stocks and could put a lid on the market’s recent upward trend. We saw back in 2022 how a determined Fed can pressure equities, making protective put options on indices like the S&P 500 a prudent strategy. The increased uncertainty about the Fed’s path will likely fuel more volatility in the coming weeks.
Looking at the CBOE Volatility Index (VIX), we see it has been trading near 13, a historically low level suggesting market complacency. Given the new inflation reality, this low volatility may not last, making VIX futures or call options attractive. Selling call options against existing positions could also be used to generate income, on the belief that the market’s upside is now capped.
