What To Expect In Wednesday's Report On Inflation

Economists anticipate the May Consumer Price Index (CPI) will show a rise in inflation, potentially reaching 2.4% annually, driven by the impact of President Trump's tariffs, particularly on 'core goods' which had previously shown price declines. The expected increase in 'core' inflation to 2.9% could pressure the Federal Reserve to delay interest rate cuts, as officials closely monitor inflation to maintain their 2% target, although they primarily use the Personal Consumption Expenditures price index as their benchmark.

Analysis

Forecasters anticipate a reversal in the recent disinflationary trend, with the May Consumer Price Index (CPI) expected to show a 2.4% year-over-year increase, up from April's 2.3%. More significantly, 'core' inflation, excluding food and energy, is projected to rise to 2.9% annually from 2.8%, potentially marking a turning point driven by President Donald Trump's tariffs. The 'core goods' component, which measures prices of commodities less food and energy, is a critical metric to watch; after monthly declines from January 2024 through March 2025, it rose 0.1% in April and is expected to increase further in May. Economists like Ronald Temple of Lazard and Michael T. Gapen of Morgan Stanley expect tariffs to exert upward pressure on prices for items such as new cars, apparel, and household appliances, forcing companies to either raise prices, cut other costs, or accept lower margins. This resurgence in CPI inflation could compel the Federal Reserve to delay anticipated interest rate cuts, as officials aim for a 2% annual inflation rate (though they primarily use the PCE price index). The Fed has maintained higher interest rates due to concerns that tariffs could reignite inflation, and Temple suggests that while rate hikes are unlikely in response to tariff-induced inflation, rate cuts are also improbable if core inflation trends towards 4%. The May CPI report is thus seen as an early 'hard data' signal of the economic impact of these tariffs, following 'soft data' from surveys that previously indicated businesses were raising prices and slowing hiring.

Key Decisions for Investors

• Investors should closely monitor the upcoming May CPI report, particularly the 'core goods' inflation figure, as a key indicator of the tangible impact of tariffs on consumer prices and corporate margins.
• Consider the possibility of a more hawkish Federal Reserve stance, potentially leading to delayed interest rate cuts if inflation accelerates, which could impact valuations of rate-sensitive assets and sectors.
• Re-evaluate exposure to companies and sectors heavily reliant on imported goods or those with limited ability to pass on increased costs, as they may face margin compression due to tariffs.