May CPI: Inflation Cools, But Tariff Uncertainty Still Looms

• The May CPI report indicated a slowdown in inflation, with a monthly increase of 0.1% and an annual rise of 2.4%, driven by declines in car and apparel prices despite persistent shelter costs.
• Core CPI, excluding food and energy, remained steady at 2.8% year over year, with a 0.1% monthly gain, reflecting muted tariff impacts and softening in categories like airline fares and vehicles.
• Energy prices dropped 1% month over month and 3.5% annually, while food prices rose 0.3%, with egg prices up 41.5% year over year, highlighting mixed pressures across sectors.

Inflation pressures showed signs of moderation in May, with the Consumer Price Index (CPI) report from the Bureau of Labor Statistics indicating a monthly increase of just 0.1%, undercutting economists’ expectations of a 0.2% rise and slowing from April’s 0.2% gain. On an annual basis, CPI edged up to 2.4%, a slight increase from April’s 2.3%, which had marked the lowest yearly rise since February 2021. This cooling trend, particularly in core inflation, which excludes volatile food and energy prices, offers a glimpse into how economic policies, including President Trump’s tariff framework, are shaping consumer prices.

Core CPI, a key gauge of underlying inflation, held steady at 2.8% year over year, matching April’s figure but falling short of the anticipated 2.9% increase. On a monthly basis, core prices rose by 0.1%, a slowdown from April’s 0.2%. The softer-than-expected core reading was driven by declines in categories like apparel and car prices, which are among the first expected to reflect the impact of tariffs. These declines signal that the 10% baseline tariffs on most countries, alongside industry-specific duties on steel, aluminum, and autos, have not yet broadly disrupted consumer prices in these sectors. However, tariffs on Chinese goods, with an effective rate around 30%, and fentanyl-related tariffs on Mexico and Canada remain in place, though a recent US-China agreement aims to ease trade tensions. President Trump described the deal as “done,” pending final approval, suggesting potential relief from further tariff escalation.

Shelter costs continue to anchor inflation’s persistence, with the shelter index rising 3.9% over the past year and 0.3% month over month in May. Rent and owners’ equivalent rent, a measure of the hypothetical rent homeowners would pay for their properties, increased by 0.2% and 0.3%, respectively. Despite these pressures, some shelter categories softened, with lodging away from home dipping 0.1%. Beyond shelter, other services like motor vehicle insurance (+7.0% year over year) and medical care (+2.5%) contributed to sticky core inflation, alongside household furnishings (+2.7%) and recreation (+1.8%).

Energy prices provided a counterbalance, with the energy index falling 1% month over month and 3.5% year over year, driven by a sharp 12% annual decline in gasoline prices. Food prices, however, ticked up, with the food index rising 0.3% in May after a 0.1% drop in April. Egg prices, while down 2.7% month over month, remain near historic highs, up 41.5% year over year, reflecting ongoing supply constraints and cost pressures in agricultural markets.

The broader economic context underscores the delicate balance policymakers face. The “Liberation Day” tariff announcements initially rattled markets, but the pause on many reciprocal tariffs and the US-China trade framework signal a shift toward de-escalation. Still, persistent shelter and service costs highlight the challenges in taming core inflation, even as energy and select goods offer relief. Investors and consumers alike are watching closely for signs of how trade policies will ripple through the economy, particularly as global supply chains adjust to the current tariff landscape. The May CPI data suggests that, for now, inflationary pressures are moderating, but structural costs in housing and services could keep price growth elevated in the months ahead.

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