The Week in Review: June 16, 2025
Tariffs MIA in Latest CPI; Renewed Geopolitical Instability
Inflation remained mild in May, showing little upward pressure. According to last week’s report from the US Bureau of Labor Statistics, the Consumer Price Index (CPI) rose just 0.1% for the month, while the annual rate settled at 2.4%.
The core CPI, which excludes food and energy, also rose 0.1%, suggesting an absence of broad-based price hikes tied to trade tensions. The core CPI is up 2.8% compared to one year ago.
The recent spate of soft inflation numbers is encouraging. Yet, instead of considering additional rate cuts, the Federal Reserve remains focused on the uncertainty surrounding tariffs—particularly their potential to slow economic growth and drive inflation higher.
Aside from a 4.3% increase in the price of major appliances last month and higher coffee and vegetable prices, broad-based price hikes tied to new levies on imported goods have yet to materialize.
Perhaps retailers may be absorbing some of the cost since profits are well above pre-Covid level.
Perhaps it’s simply too soon to gauge the inflationary impact of tariffs. Perhaps the absence of a sharp rise in inflation may simply be because tariffs have yet to be fully enacted.
Based on daily Treasury data, May net tariff revenue was about $22 billion, according to the Census Bureau, Treasury Dept., and The Budget Lab at Yale.
That implies an effective tariff rate of around 6.5% in May. A fully phased-in tariff policy implies 18%. Prior to the implementation of the latest tariffs, the effective rate was about 2.5%.
But tariffs put businesses in a difficult position: absorb them and accept lower profits, raise prices to recover the cost, or some combination.
A survey conducted last month by the New York Federal Reserve may provide some insights into any tariff-induced inflation that we may see.
The survey highlighted that about 75% of firms passed along some or all of the tariffs levied, with 31% of manufacturers and 45% of service providers passing along the entire bill.
The survey was limited and focused only on New York and Northern New Jersey, but it provides valuable insights into how businesses might respond to rising costs in the upcoming months.
While higher prices may be on the way, tariffs have yet to be reflected in the CPI. For now, the safest course of action may simply be to observe the data as it’s released.
Israel Strikes Iran: Historical Trends and Investor Reactions
The situation is still developing and can change quickly, but here are some key insights:
Israel’s attack and Iran's retaliation come after unsuccessful discussions between the U.S. and Iran over reducing Iran’s nuclear capabilities. Perhaps the biggest concern among investors is whether this conflict will escalate further. This is occurring even as the Israel-Gaza war rages on.
It's important to keep these conflicts in perspective. While serious from a geopolitical perspective, they are generally not a reason to react with our portfolios. This has been true over the past several years and across history. While markets may demonstrate a "flight-to-safety pattern" over days or weeks, markets have also been resilient over longer time frames.
Oil markets were immediately impacted, with the price of Brent crude surging over 7% following the attack. While regional conflicts do not necessarily affect the broader market, oil prices can act as a transmission mechanism. Higher oil prices affect consumers and businesses all around the world, so disruptions to supply and demand can affect the global economy. That said, the jump in oil only brings prices back to where they were as recently as April.
Some "safe haven" assets strengthened, with gold prices, the Japanese yen, the Swiss franc, and the U.S. dollar all gaining as investors sought refuge from geopolitical uncertainty. This is consistent with historical patterns during periods of heightened Middle East tensions. The exception is Treasury yields, which have increased, suggesting investors are not flocking to these bonds.
While geopolitical events can create near-term market volatility, maintaining a long-term perspective and staying focused on your financial goals rather than short-term market reactions remains the most prudent approach to building wealth over time.
Over a longer period, markets usually adjust as investors assess the broader economic implications of geopolitical events.
In other words, how might this geopolitical event impact the US economy?
LPL Research found that, on average, the S&P 500 dropped 1.1% on the first day following a major geopolitical or economic event. This analysis spans 25 historical events, dating back to the attack on Pearl Harbor in 1941. On
Friday, the S&P 500 lost 1.13% (MarketWatch).
The average decline was 4.7%, and the average bottom occurred in 19 days. It took an average of 42 days to fully recover losses.
The three steepest S&P 500 Index drawdowns
While the situation remains fluid, historically, stock markets have demonstrated resilience, recovering within weeks or months after major geopolitical shocks. More to come…
Market Summary
Please do not hesitate to contact me with any questions or concerns.
I hope you have a great week!
Bill Stordahl, CFP®
Managing Director
Stordahl Capital Management
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