After the release of the U.S. July Consumer Price Index (CPI), KB Securities noted that a key reason for the upward trend in the U.S. stock market was that there had been little to no flow of tariff being passed on to product prices.
The U.S. July CPI rose 2.7% compared to the same period last year. This was 0.1 percentage point lower than market expectations. The core CPI growth rate during the same period was 3.1%, which met market expectations. The core CPI is a measure that excludes the volatile price changes of food and energy.
While prices, excluding housing costs, mostly showed an upward trend, the U.S. Standard & Poor's (S&P) 500 index and Nasdaq reached record highs overnight. Researcher Lee Eun-taek of KB Securities explained, "The reason the market reacted positively is that the details of the CPI were not bad."
First, the CPI for products that are significantly affected by tariffs remained stable. Core product prices rose by 0.2% from the previous month. Service prices saw a sharp increase of 4% in airline fares compared to the previous month, while housing costs, which the market was most concerned about, remained stable. The Personal Consumption Expenditures (PCE) index, which the U.S. Federal Reserve uses as a reference for prices, applies the Producer Price Index (PPI) for airline fares instead of the CPI. This means that PCE prices could be lower than CPI.
Expectations for a benchmark interest rate cut in September have increased in the market. Participants in the U.S. federal funds rate (FF) futures market reflect a 94.8% probability of a rate cut at the September Federal Open Market Committee (FOMC) meeting, according to the Chicago Mercantile Exchange (CME) FedWatch Tool.
The researcher forecasted that the point at which tariffs are passed on to product prices would likely be around mid-2026, after the rate cut. He noted that it would be difficult for prices to surge in the short term due to tariff-related product price increases.
The researcher identified two main reasons for this. First, the final tariff rates have not yet been determined. The U.S. is still in trade negotiations with countries including China.
Additionally, from the corporations' perspective, the timing of when competitors pass on the tariffs to their prices is also a concern. Some electronics and clothing companies raised their prices to reflect the tariffs, but then reduced them again in July when competitors did not follow suit.
The researcher stated, "Corporations may cautiously begin to plan for price transfers," and added, "Tariffs are ultimately 'a tax on consumers,' and there are no corporations that will permanently bear this." He continued, "The timing for price increases is likely to be when demand rises, which is expected to be after the rate cut in mid-2026."