The US import price index rose 6.7% year on year in May. That compared with 4.2% previously, indicating a faster increase in the cost of imported goods.
The move marks a 2.5 percentage-point acceleration from the prior reading. On a year-on-year basis, import price inflation therefore strengthened in May relative to the earlier figure.
Inflation Shock and Implications for Fed Policy and Equities
Given today’s date of June 16, 2026, the unexpected jump in the year-over-year import price index to 6.7% is a major inflation signal. This data challenges the narrative of disinflation and pressures the Federal Reserve to maintain its restrictive stance. We believe this significantly lowers the odds of a rate cut this year, with Fed funds futures now pricing in less than a 20% chance of a cut before December.
This persistent inflation is a headwind for equities, as it squeezes corporate margins and keeps borrowing costs high. The S&P 500 has seen its earnings yield fall below the 10-year Treasury yield for the first time this year, making stocks less attractive on a relative basis. We are therefore buying put options on major indices like the SPX to hedge against a potential market downturn in the coming weeks.
Positioning for Volatility, Currency, and Bond Market Reactions
We also anticipate a rise in market volatility from its current complacent levels. The VIX index has been trading below 15 for the past month, a level historically associated with market tops before a volatility event. We are using VIX call options to position for a potential spike as the market digests this new inflationary reality.
The data also reinforces a strong U.S. dollar outlook, as the Fed will likely remain more hawkish than other central banks like the ECB. Policy divergence is a powerful driver of currency markets, as seen in the dollar’s rally throughout 2025 when the Fed held rates steady. We are adding to long U.S. dollar positions against the Euro and Japanese Yen through futures contracts.
Finally, the most direct impact will be on the bond market, where yields are set to rise. The yield on the 2-year Treasury note, which is highly sensitive to Fed policy, has already jumped 15 basis points in response to similar data points this quarter. We are positioning for further increases in yields by purchasing put options on Treasury bond ETFs like TLT.
