Inflation Was Still Mild In May On Quiet Tariff Price Impact

May's consumer price index (CPI) rose 2.4% year-over-year and 0.1% month-over-month, below economist expectations of 2.5% and 0.2% respectively, while core CPI also came in lower than anticipated at 2.8% annually and 0.1% monthly. Despite the milder-than-expected inflation data, economists, including those at UBS and JPMorgan Chase, caution that potential tariffs could reverse the progress made in cooling inflation, with UBS projecting core CPI to reach 3.9% by the end of 2025. Concerns about the accuracy of CPI data have also emerged due to reduced sampling by the Bureau of Labor Statistics in response to a federal hiring freeze.

Analysis

May's inflation data presented a milder-than-anticipated scenario, with the Consumer Price Index (CPI) rising 2.4% year-over-year and 0.1% month-over-month, both figures undershooting consensus economist forecasts of 2.5% and 0.2% respectively. Similarly, core CPI, which excludes volatile food and energy prices, increased 0.1% monthly and 2.8% annually, also below projections of 0.3% and 2.9%. Despite this immediate relief, prominent economists voice significant concerns over the potential for tariffs to reverse this disinflationary trend; Michael Feroli of JPMorgan Chase anticipates meaningfully larger price increases in coming months. UBS economists project core CPI could reach 3.9% by the end of 2025, a level historically unobserved between 1993 and 2020, underscoring the potential severity of renewed inflation. This outlook contributes to the Federal Reserve's cautious monetary policy stance, with market expectations for a July rate cut below 15% according to CME Group's FedWatch Tool, a significant shift from earlier probabilities. Compounding these concerns, the Bureau of Labor Statistics' reduction in CPI data sampling due to a federal hiring freeze may diminish the reliability and increase the volatility of future inflation reports, as noted by UBS economist Alan Detmeister. The context for these inflationary concerns includes a substantial rise in the average effective tariff rate on U.S. imports to approximately 14%, up from roughly 2% last year, as reported by JPMorgan.

Key Decisions for Investors

• Maintain a cautious outlook, balancing the positive May inflation surprise against significant forward-looking risks from tariffs that could reignite inflationary pressures.
• Closely monitor trade policy developments and their potential impact on inflation, as economists project tariffs could significantly elevate core CPI, influencing Federal Reserve policy and asset valuations.
• Adjust expectations for near-term Federal Reserve rate cuts, considering the Fed's cautious stance driven by tariff uncertainties and the low market-implied probability of imminent easing.
• Be aware of potential increased volatility and reduced reliability in future CPI data due to methodological changes at the Bureau of Labor Statistics, which could affect market interpretation of inflation trends.