U.S. May Consumer Price Index (CPI) Rises Below Expectations for the Fourth Consecutive Month
The May CPI data came in below expectations across the board. The annual CPI rose by 2.4%, lower than the market forecast of 2.5%; core CPI increased by 2.8% year-on-year, also below the expected 2.9%; and the monthly core CPI rose by just 0.1%, under the forecasted 0.3%. These figures have further eased market concerns about runaway inflation and reinforced expectations that the Federal Reserve may begin cutting interest rates in September. However, while overall price pressures remain manageable, the Trump administration's tariff policies could still exert upward pressure on inflation, allowing the Fed to maintain a relatively hawkish stance in the short term.
Energy Prices Continue to Decline, but Food and Goods Prices Rise
Falling energy prices were one of the key factors in curbing inflation. The energy index declined by 1% month-on-month in May, with gasoline prices falling by 2.6% and natural gas prices also retreating, though electricity costs rose by 0.9%. Meanwhile, prices for some goods showed significant fluctuations: driven by tariffs, banana prices rose by 3.3%, and toy prices climbed 2.2%, while egg prices dropped 2.7%. Declines in car and clothing prices further pulled down the core CPI reading.
Economists Point Out: Tariff Effects on Inflation Yet to Fully Materialize
Economists have noted that while tariff policies may accelerate inflation in the coming months, most retailers are still digesting inventory purchased before the tariffs took effect. As a result, the full impact has yet to be fully reflected. For instance, furniture prices dropped by 0.8% this month—the largest decline since December last year—which may be linked to businesses stockpiling inventory ahead of the tariffs. Major retailers such as Walmart have already indicated they will gradually raise prices in the coming months, suggesting that inflation may face upward pressure in the second half of the year.
Federal Reserve Policy Outlook: Higher Odds of a September Rate Cut
Several consecutive months of mild inflation data have reduced the urgency for the Federal Reserve to act preemptively. The market widely expects the Fed to keep interest rates unchanged at next week’s meeting and to continue monitoring the next one or two inflation reports to assess the transmission effects of the tariff policy. Given that the labor market is only showing slight signs of weakness, the likelihood of a rate cut in July remains relatively low.
However, traders have increased their bets on a rate cut in September and now expect two rate cuts in total throughout 2025. Market pricing indicates that the Federal Reserve may cut rates by a cumulative 77 basis points over the next year, with 48 basis points priced in by December—higher than previous expectations. Brian Jacobsen, Chief Economist at Annex Wealth Management, stated that the latest CPI data further confirms the Fed’s focus may be shifting from inflation threats to risks to economic growth. He added that if trade policy stabilizes, it could help prevent inflation from spiraling out of control and provide more room for rate cuts.
Trump Administration Responds: Calls for Deep Rate Cuts, Emphasizes Policy Success Following the release of the CPI data, U.S. President Donald Trump once again urged the Federal Reserve to implement substantial rate cuts. Posting in all capital letters on social media, he wrote: “CPI JUST OUT. GREAT NUMBERS! FED SHOULD LOWER ONE FULL POINT. WOULD PAY MUCH LESS INTEREST ON DEBT COMING DUE. SO IMPORTANT!!!”
Vice President Vance also criticized the Federal Reserve’s refusal to cut interest rates, calling it a “monetary policy failure,” while Treasury Secretary Bessent attributed the easing of inflation to policies enacted by the Trump administration. In his testimony before the House Ways and Means Committee, Bessent stated: “Due to slower growth in housing, food, and energy costs, U.S. inflation has reached its lowest level since 2021.” He emphasized that the current administration’s policies are significantly improving the inflation situation, and after four years of rising prices, the pressure of living costs on American households has begun to ease.
Future Risks: Tariff Impact and Consumer Resilience
Although current inflation data appears moderate, economists warn that if the Trump administration’s high tariff policies are fully implemented, it will become increasingly difficult for businesses to absorb cost pressures, potentially leading to significant price increases in the coming months. Toy prices have recorded their largest increase since 2023, and major appliance costs have seen their highest rise in nearly five years—signs that certain industries are already being affected by tariffs.
A greater risk lies in consumers' diminished tolerance for price fluctuations following the high-inflation period after the pandemic, which may lead to reduced spending. Retail giants JM Smucker and Best Buy have both indicated that rising costs could erode their profit margins. At the same time, forecasting agencies suggest that U.S. economic growth is slowing down; if inflation combines with weakened consumer spending, downward pressure on the economy could intensify.
Additionally, the U.S. Bureau of Labor Statistics recently announced that, due to resource constraints, it will suspend CPI data collection in three cities. This could affect the accuracy of future inflation data and increase uncertainty in policy-making. $Wal-Mart(WMT)$
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