US CPI for the month of May came in cooler than expected, bringing some relief to investors who feared the opposite due to President Trump’s trade policies.
While annual inflation ticked up slightly, key categories like vehicles and apparel saw unexpected declines, while energy prices continued to fall.
Report Breakdown
CPI MoM came in at 0.1%, less than expected and down from April’s 0.2%. On a yearly basis, CPI came in at 2.4%, a slight rise from April’s 2.3%, which marks the lowest increase since February 2021.
Core CPI, which excludes food and energy prices, remained steady at 2.8% YoY, with the monthly figure coming in at 0.1%, below April’s 0.2% figure. Declines in vehicles and apparel prices, expected to rise due to tariffs, were the main drivers of the lower-than-expected core CPI reading. ⁽¹⁾
Energy and Vehicle Prices Decline
Energy prices declined 1% MoM and 3.5% YoY, driven by a 2.6% decline in gasoline prices. ⁽²⁾
New and used vehicle prices dropped 0.3% and 0.5%, and apparel prices fell 0.4%, defying expectations of tariff-related increases. ⁽³⁾
Food Prices and Shelter Costs Remain Sticky
Shelter costs were one of the main drivers of inflation in May alongside food prices. The shelter index increased 0.3% MoM and 3.9% on a YoY basis. Rent and owners’ equivalent rent rose by 0.2% and 0.3%. ⁽⁴⁾
Food prices remain high, rising 0.3% in May. Egg prices were also elevated at 41.5% YoY despite a 2.7% decline on a monthly basis. ⁽⁵⁾
Tariff Impacts and Trade Developments
The May CPI report comes in at a critical time, especially after 2 months of tariff announcements and negotiations since Liberation Day in April, which introduced 10% tariffs alongside targeted tariffs on Mexico, Canada and China.
While some reciprocal tariffs have been paused, industry-specific levies on steel, aluminum and autos remain in place.
On Wednesday, the US and China agreed to a framework to ease trade tensions, with President Trump signaling approval pending finalization. The White House insists that tariffs will not lead to a rise in inflation, as foreign producers might encounter higher costs. However, economists warn that broader price increases could emerge throughout 2025 due to pre-tariff inventory orders. ⁽⁶⁾
Economic and Policy Implications
US stock indices reacted slightly positively to the report but shortly after removed gains and turned lower due to the US-China trade deal framework awaiting final approval from both parties.
President Trump announced plans to send letters to key trading partners within the next one to two weeks, detailing unilateral tariffs aimed at pressuring countries into trade agreements. ⁽⁷⁾
Vice President JD Vance repeated Trump’s call for lower interest rates from the Federal Reserve, arguing that inflation pressures haven’t been as severe as expected. However, financial markets are speculating that the Fed is unlikely to lower rates before September, as policymakers assess tariff impacts and labor market trends. ⁽⁸⁾
