US prices continued to rise in May amid Trump tariffs

US inflation edged up to 2.4% annually in May, slightly below the expected 2.5%, as companies grappled with the impact of Trump's tariffs; core inflation also rose 0.1% month-over-month. Despite Trump's claims that tariffs would lower prices, retailers are planning price increases, and surveys indicate manufacturers are experiencing declining sentiment, while the Fed is expected to hold interest rates steady amid economic instability caused by the tariffs.

Analysis

US annualized inflation edged higher to 2.4% in May from 2.3% in April, although the month-over-month consumer price index increase of 0.1% was softer than the expected 0.2% and April's 0.2%. Core inflation also moderated to a 0.1% monthly increase. These figures emerge amidst economic uncertainty stemming from President Trump's tariffs, which are contributing to price pressures despite his assertions that they would lower costs; indeed, 54% of US companies surveyed by Allianz indicated plans to raise prices due to these trade measures. Concurrently, the economy shows signs of a slight cooldown: May saw 139,000 new jobs, below the prior 12-month average of 149,000, and previous months' job gains were revised downward. Furthermore, US manufacturing sentiment declined for the third consecutive month to a six-month low, with no evidence that tariffs have spurred domestic manufacturing. The Federal Reserve, facing this instability, is widely expected to hold interest rates steady at its upcoming meeting, with current rates between 4.25% and 4.5%. The persistence of tariffs, including a 10% baseline on all imports and specific levies on Chinese goods and auto imports, continues to threaten supply chain stability and broader price increases, as exemplified by anticipated higher costs for canned foods due to steel tariffs.

Key Decisions for Investors

• Investors should closely monitor upcoming inflation reports and corporate earnings for evidence of tariff-related cost pass-through to consumers and margin compression.
• Consider a cautious stance on sectors highly exposed to international trade disputes and declining manufacturing sentiment, while remaining alert to potential shifts in trade policy.
• Anticipate that the Federal Reserve will likely maintain current interest rates in the near term due to economic instability caused by tariffs, and watch for their commentary on the evolving economic outlook.
• Factor in the potential for continued market volatility driven by uncertainty over trade negotiations and the cumulative impact of tariffs on economic growth and corporate profitability.