Modest CPI rise gives Fed breathing room as Trump pushes for steep rate cut
US inflation rose less than expected in May, with the Consumer Price Index (CPI) edging up just 0.1% from the previous month, offering tentative relief to markets concerned about the inflationary impact of President Donald Trump’s sweeping tariff regime. The annual CPI now sits at 2.4%, while core inflation—excluding food and energy—also rose 0.1% on the month, bringing the yearly core figure to 2.8%.
The data, released Wednesday by the Bureau of Labor Statistics, showed a softer inflation profile than forecast. Economists had expected monthly CPI and core CPI rises of 0.2% and 0.3%, respectively. Instead, continued declines in energy prices and surprising drops in categories like vehicles and apparel helped offset pressures elsewhere.
Gasoline fell 2.6% month-on-month, dragging the broader energy index down by 1%. Prices for used cars and trucks dropped 0.5%, and apparel declined by 0.4%. On the other hand, food prices rose 0.3%, and shelter costs—up 0.3% in May and 3.9% year-on-year—remained a key driver of overall inflation.
Muted tariff impact—so far
Despite fears that Trump’s new tariffs would accelerate price growth, their impact has yet to show up in a significant way. The president’s April 2 “liberation day” measures imposed 10% universal duties and a slew of reciprocal tariffs. So far, however, firms appear to be managing through existing inventories and delaying pass-through to consumers.
“Tariff-driven price increases may not feed through to the CPI data for a few more months yet,” said Seema Shah, chief global strategist at Principal Asset Management. Goldman Sachs’ Alexandra Wilson-Elizondo echoed the view, noting that the subdued reading reflects “uncertain demand” and inventory absorption.
Still, analysts warn that as inventories dwindle and import costs rise, more pronounced effects could emerge in the second half of 2025. JPMorgan’s Michael Feroli forecast “meaningfully larger increases” later this year, though the timing remains uncertain.
Market reaction and political pressure
Markets responded favourably to the report. Treasury yields fell, stocks ticked higher, and rate cut expectations firmed. The Fed is not expected to cut rates at its June 18 meeting, but futures markets now price in a strong likelihood of a cut by September.
Trump seized on the data to demand a 100 basis point rate cut, calling the Fed’s current stance “monetary malpractice.” Vice President JD Vance joined in, saying the Fed had “no excuse” not to act.
Fed officials, however, have maintained a cautious stance. While acknowledging softer inflation and a cooling labour market, they remain wary of premature cuts—especially given the uncertain inflationary path of Trump’s trade policies.
Data quality concerns
Adding complexity, recent hiring freezes and cost-cutting measures have reduced the Bureau of Labor Statistics’ capacity to collect price data. The agency has expanded the use of imputation—modelling used to fill in gaps—while suspending data collection altogether in locations like Lincoln, Nebraska, and Provo, Utah. Analysts warn that these changes may introduce more volatility into monthly CPI readings and weaken the robustness of sub-index estimates.
Outlook: Temporary reprieve or delayed spike?
While the May numbers offer a reprieve, most economists caution against assuming inflation is fully under control. UBS projects core CPI will climb to 3.9% by year-end—its highest since January 2024. The Fed may have room to ease if inflation stays muted, but the full impact of tariffs has yet to unfold.
