US May CPI May Show Initial Signs of Rising Inflation, Gold Bulls and Bears Brace for Battle!

At 20:30 Beijing time on Wednesday, the US Bureau of Labor Statistics will release the May Consumer Price Index (CPI) report. People will closely monitor these data to see if US President Trump's tariffs are beginning to impact consumer prices. Chicago Fed President Austan Goolsbee has warned that April's inflation report may represent the last calm before tariffs lead to a rise in inflation.

The median forecast from economists indicates that the overall US CPI for May is expected to maintain a MoM growth rate of 0.2%, with the YoY growth rate rising from the four-year low of 2.3% touched last month to 2.5%. For the core CPI, which excludes the more volatile food and energy categories, the MoM growth rate is expected to increase from 0.2% in April to 0.3%, while the YoY growth rate is projected to rise from 2.8% to 2.9%, reversing the downward trend seen so far this year.

Forecasters suggest that core inflation in the US may rebound in May, reflecting the mild impact of tariffs being passed on to major imported goods, while prices for some services, such as airfares, are expected to narrow their gains or fall outright.

Samuel Tombs and Oliver Allen, economists at Pantheon Macroeconomics, noted in a report: "Only a handful of goods prices are likely to rise in May due to new tariffs—June will be different—while some non-essential service providers may cut or maintain low prices to support demand."

Rising Goods Inflation, Weakening Service Prices

Economists have been closely watching how tariff costs will be passed on to consumers. As of April, the CPI report showed minimal impact, as firms absorbed some of the costs and relied on inventories purchased before the tax increases. However, companies, including Walmart, have indicated they will begin raising prices for some goods.

Bank of America economists Stephen Juneau and Jeseo Park stated in a report that the impact of tariffs on May's data should be broader than in April.The most obvious sign of tariff-driven price increases in April was the 8.8% MoM surge in audio equipment prices. Other notable categories include heavily taxed goods such as clothing, new cars, and household appliances.

Wells Fargo economists Sarah House and Nicole Cervi pointed out: "Inventory accumulation ahead of the tax increases and expectations of potential reductions in the current tariff scale have so far curbed cost increases. However, as high tariffs persist, it may become more challenging to shield consumers from cost shocks."

On the other hand, forecasters have pointed out that disinflation in the services category may have curbed the overall CPI increase.

Andrew Schneider of BNP Paribas said that airfare and hotel prices have remained sluggish in recent months, and deflation is expected in both categories in May. In his report, he noted that the decline in foreign tourists may have contributed to the price weakness.

Anna Wong, a strategist at Bloomberg Economics, believes that the price drops in some service categories reflect consumers cutting back on non-essential spending. She also expects airfares to decline.

"Both consumers and government departments are cutting back on travel spending this year, and airfares continued to deflate in May," Wong wrote in her report.

How many more months will the US Fed have to wait?

Economists and US Fed officials have differing views on when the impact of tariffs on inflation will fully materialize.

Goldman Sachs expects tariffs to push up commodity prices and overall inflation in the coming months, but this increase will be one-off, after which prices will return to normal. In the May CPI data, the institution expects the impact to be relatively small, with core inflation projected to rise 0.05% to 0.25% MoM.

Looking ahead, Goldman Sachs expects core inflation to reach 3.5%, up from 2.8% in April, but with easing pressures in the labour market, housing, and automotive sectors. The institution also expects hotel and airfare prices to remain flat in the short term, with most inflation coming from goods rather than services.

Other perspectives suggest that companies may not raise prices until surplus inventories are digested. Due to the inventory surplus before April, it may take several more months to digest inventories. According to information as of May 23, the US Fed's latest Beige Book shows that companies planning to pass on tariff-related costs expect to achieve this goal within three months.

Debates on the inflation outlook have also taken place within the US Fed. Minneapolis Fed President Neel Kashkari said that the Federal Open Market Committee (FOMC) had a useful debate on whether to view price-related increases through the lens of tariffs, and he found the argument against ignoring the impact of tariffs on inflation more compelling.

Several others, including US Fed Governor Adriana Kugler, seem to agree with this view. Kugler noted that the impact of tariffs on prices may be more persistent. Atlanta Fed President Raphael Bostic has said he is particularly concerned about inflation and the public's expectations for future price increases, believing that "it will take three to six months to see how things unfold."Goolsbee, however, expressed some "trepidation" about the claim that tariffs would have a temporary impact on inflation.

On the other side of the argument was Fed Governor Waller, who believed that tariffs would lead to a one-time increase in prices and stated that it was standard practice for central banks to overlook one-time price hikes.

Fed Chairman Powell and his colleagues have indicated that there is time to assess the impact of trade policies on the economy, inflation, and the job market. The market widely expects the Fed to keep interest rates unchanged at its meeting next week.

The recent strong non-farm payrolls report has already led traders to lower their expectations for a Fed interest rate cut. The money market expects the Fed to cut interest rates by 45 basis points before the end of the year, suggesting that only one rate cut by the Fed this year is fully priced in, with an 80% probability of a second cut.

The latest Reuters Fed survey showed that 59 out of 105 analysts believe the Fed will resume interest rate cuts next quarter, possibly in September, and 60% of analysts think the Fed will cut interest rates at least twice, but this is only a slim majority. In the absence of guidance from the Fed, analysts' expectations are also widely dispersed.

Fed officials have generally urged a wait-and-see approach, avoiding providing any specific guidance on the path of interest rate cuts. San Francisco Fed President Daly has previously stated that two rate cuts this year still seem reasonable, while Bostic still expects only one rate cut. However, both have warned that this largely depends on how the economy develops.

Market Reaction

A few hours after the release of the CPI data, the US Treasury will hold two crucial Treasury auctions. It will sell $39 billion in 10-year Treasury notes in the early hours of Thursday and $22 billion in 30-year Treasury notes in the early hours of Friday. These results could have a significant impact on the direction of the economy, the Fed's response, and its interest rate policy stance. Coupled with the comprehensive tax and spending bill currently under consideration in Congress, volatility in the US Treasury market is set to intensify.

This week's Treasury auction results will be closely watched, although economists and investors generally believe there will be no major surprises. Chip Hughey, head of fixed income at Truist Advisory Services, said, "If you look at the current yield levels relative to global peers, US Treasuries still offer a relatively attractive advantage... I expect demand to be quite strong, especially for the 10-year note auction."

The US dollar index, which typically fluctuates with US Treasury yields, rebounded in the first half of May before pulling back to consolidate above the three-year low near the 98 mark. The counter-trend rebound has alleviated the oversold condition of the US dollar index's 14-day Relative Strength Index (RSI) , potentially laying the groundwork for the next round of declines, especially if inflation falls short of expectations.

Technically speaking, the lows around 98 represent the most significant support level to watch , while the nearest clear overhead resistance comes from the downtrend line near 99.50 . Even if a hotter-than-expected inflation report triggers a rebound in the US dollar index, bears may look to sell into strength, joining the ongoing downtrend at more favorable prices.

For gold, the current technical setup favors the bulls. If gold prices strengthen further and break through the immediate resistance level of $3,352-3,353 , it will reaffirm the bullish outlook and advance towards the intermediate resistance level of $3,377-3,378, thereby challenging the round-number resistance at $3,400.

On the other hand, a pullback in gold below the $3,323-3,322 area may continue to attract some buyers and find decent support around $3,300 . If subsequent selling intensifies, gold prices may subsequently break below the $3,288-3,287 area, shifting market bias in favor of the bears and dragging prices down to the monthly swing low near $3,245, with this corrective decline potentially extending even further to near $3,200.

In the current environment, tariff headlines and any potential trade agreements (especially between the US and China) may have a greater impact on the market than this month's inflation report , making it crucial to monitor developments in these areas as well.