There's no sign yet of a tariff-related cost spike for households – and the central bank is likely to be in cutting mode before the end of 2025
US inflation data for May signaled another month of easing price pressures, providing further evidence that households have yet to fully absorb the costs of recent tariffs.
The moderation in consumer prices—particularly in core categories like goods and services—has fueled expectations that the Federal Reserve may move to cut interest rates before the end of 2025, though no immediate action is anticipated.
The consumer price index (CPI), excluding food and energy, increased by just 0.1% from April—below economists’ expectations of a 0.3% rise. On an annual basis, the core CPI rose 2.8%, compared to a 2.9% forecast. Broader inflation also held steady, with headline CPI climbing 2.4% from a year earlier, matching projections.
These figures mark the fourth consecutive month of softer-than-expected core inflation and underscore how many businesses are still absorbing rising costs instead of passing them on to consumers.
“May CPI inflation data came in cooler than expected,” said Sam Williamson, senior economist at First American. “Goods prices were flat month over month, with prices on tariff-sensitive items, like autos and apparel, declining. Shelter remains the main inflation driver, rising 0.3% on a monthly basis.”
Price changes across major spending categories were subdued. Goods excluding food and energy showed no increase, with vehicle prices and clothing costs falling in May. Meanwhile, airfares and hotel stays also declined, helping to slow services inflation. Overall, services prices minus energy rose just 0.2%, down from the previous month.
One of the few categories with notable increases was toys, which surged by the most since last year. Large appliances also saw their steepest price jump in nearly five years—both potentially reflecting lingering effects of import duties.
Grocery bills crept higher, up 0.3% from April. The cost of staples like cereals, bacon, and fish rose, though egg prices dropped nearly 3%. Ground beef prices were up as well, possibly reflecting tighter supply amid low cattle herd numbers.
Gasoline prices, not included in core CPI, declined by 2.6% and helped curb overall inflation.
Fed rate cut prospects rise as market reacts
The financial markets responded swiftly. Treasury yields fell, the dollar weakened, and stock futures gained ground after the data release. Interest rate swaps indicated a 75% likelihood that the Fed will begin cutting rates by September, as investors interpreted the CPI data as a sign of reduced urgency for further tightening.
“While the softening inflation data is not enough to spur immediate Federal Reserve action, the May CPI report bolsters the case for rate cuts later this year—though signs of tariff-driven inflation will stay in focus,” Williamson noted.
Shelter still a key inflation driver
Housing remains the largest contributor to overall inflation. Shelter costs rose 0.3% for the second straight month, a trend that continues to weigh heavily on household budgets. When excluding shelter and energy, services inflation slowed to 0.1% in May, bringing the year-over-year increase in those costs to 2.9%.
That moderation could eventually reflect in the Fed’s preferred inflation measure—the personal consumption expenditures (PCE) price index—which places less emphasis on shelter. The next PCE report, expected later this month, will be closely watched for further confirmation of disinflationary trends.
Trade policy uncertainty clouds outlook
Despite signs of easing price pressures, uncertainty surrounding US trade policy continues to influence the inflation narrative. A temporary de-escalation in US-China trade tensions has helped reduce inflation expectations, but companies from Walmart to Ford have signaled that steeper tariffs could eventually push prices higher.
A recent Fed survey also noted that price growth remained “moderate” in most regions, though some areas anticipate stronger increases ahead.
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