The latest US inflation data for May has raised a sense of relief, as both headline and core Consumer Price Index (CPI) figures increased by just 0.1% month-on-month. These results came in below market expectations, which anticipated a 0.2% rise for headline inflation and a 0.3% increase for core. This softer outcome can be attributed to prevailing weaknesses in service sectors, coupled with the understanding that the impacts of recently imposed tariffs are not expected until around July. Historically, a similar pattern was observed when a 20% tariff was applied to washing machines in 2018, allowing time for existing inventory to buffer price hikes.
Currently, the US inflation trajectory aligns with a monthly run rate of approximately 0.17%, which would effectively reduce annual inflation to the targeted 2%. Notably, the decline in apparel prices by 0.4% and new car costs dropping by 0.3% helped to keep inflation subdued, indicating a lack of preemptive price increases in anticipation of tariffs. Additionally, airline fares have decreased for four consecutive months, and rental costs for housing rose by a modest 0.3%. However, apprehensions regarding tariffs remain prevalent.
Market participants should take caution not to downplay these concerns. Insights from the Fed’s Beige Book indicated that many contacts anticipate rising costs and prices linked to tariffs in the near future. Reports from various districts described these expected increases as strong or substantial, with several firms planning to pass along tariff-related costs within three months. Consequently, stronger inflation figures are expected in July and August, with headline CPI potentially reaching 4% year-on-year in the third quarter.
Despite the anticipated one-time price hikes from tariffs, which will influence annual comparisons until late summer 2026, data from the Cleveland Fed suggests that housing factors, comprising 40% of core inflation, could drive disinflation in the upcoming year. Given that the US economy is heavily service-driven, labor costs—a significant cost driver—could further cushion the tariff impact, especially with a slowing job market. Therefore, there remains a strong possibility for inflation to hit the 2% mark by late 2026, potentially paving the way for Federal Reserve rate cuts in late 2025.