Tariffs seen lifting underlying US consumer prices in May

U.S. consumer prices likely rose moderately in May, with the CPI expected to increase 0.2% and core CPI climbing 0.3%, the largest gain since January, potentially signaling the start of tariff-related inflation. Economists anticipate that President Trump's import duties are beginning to impact prices, with Walmart already indicating price increases, though the Bureau of Labor Statistics faces staffing challenges that have led to the suspension of data collection in some cities and raised concerns about data quality, though officials maintain data continues to meet rigorous standards.

Analysis

The U.S. Consumer Price Index (CPI) for May is anticipated to reflect a moderate 0.2% month-over-month increase, consistent with April, while the annual CPI is forecast to accelerate to 2.5% from 2.3%, partly due to base effects. Significantly, core CPI, which excludes food and energy, is projected to rise 0.3% month-over-month—its most substantial gain since January—pushing the year-over-year core inflation rate to an estimated 2.9% from 2.8%. Economists attribute this expected uptick in underlying inflation primarily to the initial pass-through of the Trump administration's import tariffs, with retailers such as Walmart (WMT) having announced price increases commencing in late May and June. This suggests May could initiate a period of tariff-induced inflation persisting through year-end. Concurrently, the Bureau of Labor Statistics (BLS), the agency compiling CPI data, is navigating considerable operational headwinds from resource constraints, including staff reductions reportedly exceeding 15% and hiring freezes linked to a broader governmental downsizing effort. These challenges have necessitated the suspension of CPI data collection in three cities and the planned discontinuation of approximately 350 Producer Price Index series. While the BLS asserts its published data adheres to rigorous standards and a former commissioner indicated national CPI reliability remains largely intact due to electronic data collection, concerns linger regarding the precision of disaggregated data and the potential for broader repercussions if these constraints intensify. The Federal Reserve, which maintains a 2% inflation target, is expected to keep its benchmark interest rate in the 4.25%-4.50% range in its upcoming meeting while monitoring the economic ramifications of these tariffs and inflation trends.

Key Decisions for Investors

• Investors should closely monitor forthcoming U.S. CPI releases for evidence of sustained, tariff-driven increases in core inflation, as this could influence future Federal Reserve monetary policy deliberations beyond the current expectation of stable rates.
• Consider evaluating portfolio exposure to sectors highly sensitive to import costs and consumer price elasticity, particularly retail, given that companies like Walmart are beginning to transfer tariff-related expenses to consumers.
• Maintain awareness of the operational challenges at the Bureau of Labor Statistics and exercise a degree of caution regarding the granularity and potential future stability of economic data, even though national-level CPI accuracy is currently reported as maintained.