U.S. Consumer Price Index (May 2025)

Inflationary pressures remain subdued in May, but tariff impacts likely to heat-up over the coming months

• The Consumer Price Index (CPI) rose 0.1% in May, a tick below the consensus forecast in Bloomberg and modest deceleration from April's gain of 0.2% m/m. On a twelve-month basis, CPI was up 2.4% (from 2.3% in April). 
  
  • Energy costs (-1.0% m/m) were lower on the month and helped to partially offset the uptick in food prices (0.3% m/m). 
• Excluding food and energy, core inflation rose a subdued 0.1% m/m, marking a deceleration from April's gain of 0.2% m/m. The twelve-month change held steady at 2.8% for the third consecutive month, while the three-month annualized fell to a ten-month low of 1.7%.
• Services prices rose a 'soft' 0.2% m/m (0.17% m/m unrounded), as primary shelter costs slowed (to 0.3% m/m from 0.4% m/m in April), while price growth for non-housing services (0.1% m/m) came in on the softer side.
  • Travel costs (-0.9% m/m) were down for the fourth consecutive month, as both hotels and airfares were lower. Price growth for recreational services (-0.1% m/m) also registered a decline.
• Core goods inflation was flat on the month, but after excluding new (-0.3% m/m) and used (-0.5% m/m) vehicle prices, goods prices were up 0.2% m/m – matching last month's gain.

Key Implications

• On the surface, price pressures remained subdued in May. But looking under the hood, there's already some evidence to suggest that tariff passthrough is underway. We expect prices pressures for consumer goods to heat up over the coming months, as businesses drawdown on existing inventory stockpiles and higher input costs start to squeeze profit margins. The push higher on goods prices is likely to eclipse the cooling in services inflation that is currently underway, leading to a turn higher in core inflation measures. 
• From the Fed's standpoint, this morning's release does little to alter their near-term decision making. Policymakers remain in a holding pattern until they gain more certainty on how the administration's trade and fiscal policies will impact both the real economy and inflation trajectory. With the labor market still healthy and near-term inflation likely to drift higher, the prospect of a summer rate cut has faded. Post release, Fed futures are pricing just 20bps of policy easing by September.

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