Inflation might start to rise again due to tariffs. May CPI in Wall Street's crosshairs.

May CPI data is expected to show a slight increase in inflation, potentially signaling an end to the recent decline and raising concerns about the impact of tariffs on sustained price pressures. Economists anticipate a 0.2% rise in consumer prices and a sharper 0.3% gain in the core rate, potentially pushing the yearly inflation rate to 2.4% and the core rate to 2.9%. While some Fed officials believe the inflationary impact of tariffs will be temporary, others warn of a more persistent rise, potentially limiting the Fed's ability to cut interest rates and impacting economic growth.

Analysis

The upcoming May Consumer Price Index (CPI) report is a focal point for Wall Street, with expectations of inflation accelerating for the first time in four months, primarily driven by U.S. tariffs. Economists forecast a 0.2% increase in consumer prices and a more significant 0.3% rise in the core rate, potentially pushing the annual inflation rate to 2.4% from 2.3% and the core rate to 2.9% from 2.8%. This uptick, if realized, would mark the first increase in the yearly inflation rate since early 2025 and leave the Federal Reserve short of its 2% target. Despite inflation slipping to a four-year low of 2.3% in March and April, concerns are mounting that tariffs could reverse this trend. Opinions diverge on the persistence of this inflationary pressure: strategists at Glenmede and St. Louis Federal Reserve Bank President Alberto Musalem anticipate inflation could exceed 3% by year-end and remain sustained if tariffs persist. Conversely, Fed Governor Christopher Waller and analysts at Wilmington Trust view the tariff-induced price hikes as a temporary, one-time event, expecting inflation to revert to lower pre-tariff levels, potentially allowing the Fed to resume interest rate cuts in the second half of 2025. The report carries a 'mixed' sentiment and a moderate market impact score of 0.65, reflecting this uncertainty. The resolution of this debate—whether inflation is transient or persistent—will significantly influence the Federal Reserve's capacity to adjust interest rates in response to economic conditions.

Key Decisions for Investors

• Investors should closely monitor the upcoming May CPI data, as it could signal a pivotal shift in the inflation trajectory and influence Federal Reserve policy.
• Consider positioning for potential market volatility, as a higher-than-expected inflation print might temper expectations for Fed rate cuts, while a lower reading could fuel market rallies.
• Evaluate portfolio allocations based on the two potential scenarios: sustained higher inflation driven by tariffs, which could favor inflation-hedging assets, or a temporary price surge, which might support a risk-on stance later in the year.
• Stay attuned to developments in U.S. trade policy and tariff levels, as these are identified as the primary determinants of the near-to-medium term inflation outlook.