US CPI in May Falls Short of Expectations Across the Board, Impact of Trump's Tariffs Not Yet Fully Felt

On Wednesday local time, data released by the US Department of Labor showed that the full impact of Trump's across-the-board tariff hikes had yet to be fully realized, with US CPI inflation in May falling short of expectations across the board.

Following the data release, spot gold continued to rally, breaking through the $3,360/ounce mark, while the three major US stock index futures surged in the short term.

Specific data revealed that the US unadjusted CPI year-on-year rate for May was recorded at 2.4%, lower than the market expectation of 2.5%; the seasonally adjusted CPI month-on-month rate for May was recorded at 0.1%, lower than the expected 0.2% and the previous value of 0.2%.

Excluding food and energy costs, the core CPI rose 2.8% YoY, remaining at the lowest level since March 2021, with an expected value of 2.9% and a previous value of 2.8%; the seasonally adjusted core CPI month-on-month rate for the US in May was recorded at 0.1%, with an expected value of 0.3% and a previous value of 0.2%.

The US Bureau of Labor Statistics pointed out that persistent weakness in energy and service prices offset the impact of price increases in other goods, while some key items originally expected to rise due to tariffs, particularly car and clothing prices, actually saw price reductions.

Data showed that energy prices fell 1% in the month, with gasoline prices dropping 2.6%, and prices for new and used cars falling 0.3% and 0.5%, respectively. Food prices rose 0.3%, and housing prices also increased by 0.3%, while clothing prices unexpectedly declined by 0.4%, indicating that the cost increases from tariffs had not yet been passed on to consumers.

Nick Timiraos, known as the "Fed Whisperer," commented that the decline in car and clothing prices contributed to the core CPI reading in May falling short of expectations. Some forecasters had believed these two categories would show the early impact of tariffs in May.

Economists expect that, as most retailers are still selling goods stockpiled before the tariffs took effect, the full impact of President Trump's across-the-board tariff hikes on inflation has yet to be fully realized. Inflation is expected to accelerate in the second half of this year, with Walmart indicating last month that it would begin raising prices in late May and June.

Seema Shah, Chief Global Strategist at Principal Asset Management, stated, "Today's below-expectation inflation data is reassuring—but only to a certain extent. It's premature to conclude that price shocks won't materialize."

Shah believes that the impact of tariffs may not be reflected in inflation data until late summer, due to inherent delays in economic data, ongoing changes in tariff policies, merchants stockpiling goods in advance and offering discounts, and some costs being absorbed by retailers and manufacturers themselves.

Market pricing suggests that the US Fed may not consider further interest rate cuts before September, as policymakers are assessing the impact of tariffs on inflation. Trump has been urging the US Fed to lower interest rates amid cooling inflation and a slowing labour market.

The CME Group's FedWatch Tool indicates that the probability of an interest rate cut by the US Fed in June is almost zero, while the likelihood of a cut in September is close to 70%.

Goldman Sachs analysts stated that mild inflation data in May suggests that tariffs are not having a significant impact at present, as companies have been using existing inventory or slowly adjusting prices due to uncertain demand. "Although we may see some price increases for certain goods in the future, service prices are expected to remain stable, suggesting that any rise in inflation is likely to be temporary."

Brian Jacobsen, chief economist at Annex Wealth Management, said that the current CPI data is much milder than expected. While some imported food prices have risen significantly, such as bananas by 3.3% and toys by 2.2%, egg prices have fallen by 2.7%. Greater stability in trade policies would greatly help avoid runaway inflation. This also reaffirms why the US Fed may shift its risk focus from inflation threats to threats to economic growth.