May CPI preview: Inflation expected to tick higher as tariff uncertainty lingers

May's CPI is expected to show a slight acceleration in inflation, with headline CPI projected to rise to 2.4% year-over-year from 2.3% in April, and core CPI expected to increase to 2.9% from 2.8%. Economists are closely watching the report, due Wednesday, for signs that tariffs are impacting consumer prices, with Wells Fargo anticipating a modest rise in overall and core inflation from higher goods prices. Goldman Sachs expects monthly core CPI inflation of around 0.35% over the next few months, while BNP Paribas anticipates hotter prints in June and July, noting that tariff-related price increases typically appear two to three months after implementation; however, broader uncertainty about the timing and impact of tariff-related price changes has weighed on the outlook.

Analysis

The upcoming May Consumer Price Index (CPI) report is anticipated to reveal a slight acceleration in inflation, with headline CPI projected to increase to 2.4% year-over-year from April's 2.3%, and core CPI, which excludes food and energy, expected to rise to 2.9% from 2.8%. Month-over-month, headline prices are forecast to increase by 0.2%, consistent with April, while core prices are expected to accelerate to a 0.3% increase from 0.2% in April. This report is particularly significant as it offers an early indication of the extent to which recent tariffs, including a 10% baseline duty and specific levies on goods from China (effective rate around 30%), Mexico, and Canada, are translating into higher consumer costs. Economists, such as those at Wells Fargo, anticipate a modest impact on May's figures from higher goods prices but caution that the risk of more pronounced inflation remains for later in the year. Goldman Sachs projects monthly core CPI inflation around 0.35% for the next few months, highlighting a potential sharp acceleration in core goods categories. BNP Paribas concurs, suggesting that while May's core inflation could see its strongest monthly gain since Q2 2023, more substantial increases are likely in June and July, as tariff-related price hikes typically manifest with a two to three-month lag. Overall, there is considerable uncertainty regarding the precise timing and magnitude of tariff impacts on inflation, contributing to a cautious market outlook.

Key Decisions for Investors

• Investors should closely monitor the May CPI release for initial signs of tariff pass-through to consumer prices, paying particular attention to the core goods components.
• Consider that the full inflationary impact of tariffs may not be evident until subsequent reports for June and July, as suggested by economists, potentially warranting a defensive posture or inflation-hedging strategies if data trends higher.
• Evaluate portfolio sensitivity to sustained or accelerating inflation, especially in sectors most exposed to import costs and consumer discretionary spending, should tariffs lead to more significant price increases than currently anticipated.