U.S. May CPI Falls Short of Expectations; Tariff Impact Yet to Materialize

On June 11, the U.S. Department of Labor released its latest Consumer Price Index (CPI) data, revealing that the impact of recent tariff increases has yet to fully materialize. The May CPI figures fell below market expectations, indicating weaker-than-projected inflation across key categories.

Following the release, spot gold surged past $3,360 per ounce, and U.S. stock futures saw brief gains across the three major indexes. According to the report, the unadjusted CPI rose 2.4% year-over-year, underperforming the 2.5% market forecast. On a seasonally adjusted basis, monthly CPI increased 0.1%, lower than both the anticipated 0.2% and the previous month’s 0.2%.
Core CPI, which excludes food and energy, climbed 2.8% year-over-year, maintaining its lowest level since March 2021. The figure missed expectations of 2.9%, remaining unchanged from April. On a monthly basis, core CPI rose 0.1%, lagging behind the forecasted 0.3% and dropping from April’s 0.2%.

The U.S. Bureau of Labor Statistics attributed the muted inflation to declining energy and service prices, which counteracted price increases in other sectors. Items previously expected to rise due to tariffs, such as automobiles and clothing, instead recorded price declines. Energy prices fell 1% in May, including a 2.6% drop in gasoline prices. Prices for new and used vehicles decreased 0.3% and 0.5%, respectively. Food prices edged up 0.3%, while housing costs registered a similar 0.3% increase. However, clothing prices unexpectedly dropped 0.4%, suggesting that tariff-related costs have not yet been passed on to consumers.

Wall Street Journal reporter Nick Timiraos noted that declining auto and apparel prices contributed to the lower-than-expected core CPI, diverging from forecasts that anticipated early signs of tariff impact. Economists suggest that many retailers are still selling inventory purchased before tariffs took effect, delaying their inflationary consequences until later in the year. Walmart previously announced plans to raise prices in late May and June.

Seema Shah, Chief Global Strategist at Principal Asset Management, acknowledged that while the weaker inflation data offers some reassurance, it is too early to dismiss potential price pressures. She emphasized that tariff effects may not fully materialize until late summer, due to factors such as reporting delays, shifting policies, early stock purchases, discounts, and businesses absorbing costs.

Market indicators suggest that the Federal Reserve is unlikely to cut interest rates before September, as it monitors the tariff-driven inflation outlook. President Trump continues to push for lower rates, citing easing inflation and a slowing labor market. Data from CME’s FedWatch tool indicates that the probability of a rate cut in June remains near zero, while September’s likelihood has climbed to almost 70%.

Goldman Sachs analysts stated that May’s mild inflation figures suggest tariffs have had minimal impact so far, with companies relying on existing inventory and gradual price adjustments amid uncertain consumer demand. Although some goods prices may rise, service costs are expected to hold steady, signaling that any inflation increase could be temporary.
Brian Jacobsen, Chief Economist at Annex Wealth Management, remarked that the May CPI report showed softer inflation than projected. While certain imported food items saw notable price hikes, including bananas (up 3.3%) and toys (up 2.2%), egg prices fell 2.7%. Jacobsen emphasized that greater trade policy stability would help control inflation risks, adding that the Federal Reserve could pivot its focus from inflation management toward economic growth concerns