US Macro Insights: May 2025 CPI Preview
Last of the softer inflation reports or will tariff effects start showing up now?
Summary: Both household and business surveys show that there is an expectation that higher tariffs will feed into consumer inflation at some point, but it has yet to fully materialize in the official data (CPI & PCE). May marks a full month after “liberation day” and the escalation with China, and business leaders have reported a willingness to pass higher tariffs onto consumers. With that said, there was also significant uncertainty in May regarding trade policy, both with the subsequent China de-escalation and the court ruling on IEEPA tariffs. Firms may be reluctant to raise prices in the short term as prices are generally downwardly rigid, which can delay inflation on consumer goods.
Market Implication: In general, recent inflation readings have come in on the softer side. The services sector is holding less pricing power as the consumer, among all the fiscal/tariff uncertainty and ongoing loosening of the labor market, has been pulling back on discretionary spending. If this trend of softer core services inflation continues, along with the steady easing in shelter costs (which if excluded from total CPI, annual inflation runs below the Fed’s target of 2%), there is a chance that the May inflation reading will be soft enough to not cause any alarm for the Fed ahead. If CPI doesn’t surprise to the upside, this should help both stabilize and turn around Fed rate cut expectations which currently sit at 15% for July and 52% for September, respectively. That said, we do not expect rates to rally much given supply ahead and markets will save some dry powder to allocate post FOMC next week.
