CPI report reveals inflation crept higher in May as tariff impact was tamer than expected

Inflation ticked higher in May but was more stable than expected as the early effects of President Donald Trump’s wide-ranging tariffs were offset by another drop in gasoline prices.
Rent inflation, a big driver of price increases the past couple of years, fell to a more than three-year low.
Consumer prices increased 2.4% from a year earlier, up from a four-year low of 2.3% the previous month, according to the Labor Department’s consumer price index, a measure of average changes in goods and services costs. But the rise was was more modest than expected and resulted from a larger gap with the year-ago figure.
On a monthly basis, costs increased just 0.1%, less than projected, after rising 0.2% in April.
Many forecasters expected Trump’s import fees to start trickling into prices last month while others figured the effects would be dampened by strategies intended to soften the blow.
What is meant by core inflation?
Core inflation, which excludes volatile food and energy items and is watched closely by the Fed because it captures longer-lasting trends, increased 0.1% after rising 0.2% in April. That kept the annual increase at a four-year low of 2.8%.
There were some signs of tariffs in the report but they were more subdued than anticipated. Major appliance costs jumped 4.3% and toys rose 1.3% but new car prices dropped 0.3%, apparel fell 0.4% and furniture slid 0.8%.
Used car prices, which are also expected to eventually rise as new car tariffs spur more demand for previously owned vehicles, fell 0.5%.
"We expect to see a stronger and broader pass-through (of tariff) over the summer," Nationwide economist Oren Klachkin wrote in a note to clients.
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How soon will the Fed lower interest rates?
Normally, a tame inflation reading could lead the Federal Reserve to consider reducing interest rates at a June 17-18 meeting.
But in light of lingering uncertainty about the course of tariffs, Fed officials have said they’ll wait and see how the levies affect inflation and the economy before resuming a rate cutting campaign that has been on hold since December.
The Fed raises rates, or keeps them higher for longer, to fight inflation and lowers them to stimulate a weak economy. Tariffs are expected to both raise inflation and undermine growth, posing a dilemma for the central bank as it seeks to determine which problem looms larger.
Despite rising price, fed funds futures markets believe officials will cut rates by a quarter point in both September and December as the economy and job market start to teeter.
Why are gasoline prices dropping?
Gasoline prices fell 2.6%, the fourth straight monthly decline, and are down 12% over the past year. Regular unleaded averaged $3.12 a gallon Tuesday, down from $3.14 a month ago and $3.45 a year ago, according to AAA.
Oil prices have declined this year on concerns the trade war will hamper the global economy and oil production increases by OPEC countries, leading gas prices lower. In recent weeks, crude prices have moved up a but on hopes that US-China trade talks will bear fruit.
Will rent prices go down?
Average rent increased 0.2%, pushing down the annual increase to 3.8%, smallest since January 2022. Lower rents for new leases are finally filtering into rates for existing tenants.
Housing costs have been the biggest inflation driver, making up 35% of overall price increases in May.
Other service costs dipped or increased less than expected. Airline fares dropped 2.7%, the third straight decline, as tariff-related uncertainty dampens Americans’ discretionary spending and discourages some foreign visitors. Hotel rates slipped 0.1%, as did car repairs. And medical care costs rose just 0.2%, down from previous months. But car insurance costs continued to climb, rising 0.7% in May and 7% from a year ago.
Will groceries get cheaper in 2025?
Grocery costs increased 0.3% following a 0.4% drop the previous month.
Egg prices fell 2.7% after tumbling 12.7% the previous month. Costs are moderating after a flurry of surges tied to a long-standing bird flu outbreak that has eased recently. Egg prices are still up 41.5% the past year.
Other staples also got less expensive, with bread prices falling 0.4% and chicken, 0.2%.
Other items got pricier, including breakfast cereal, by 2%; rice, by 0.8%; and uncooked ground beef, by 1%.
The cost to dine out, meanwhile increased 0.3% and is up 3.8% annually as labor shortages sparked by the pandemic continue to push up employee wages and menu prices.
Will tariffs increase inflation?
Barclays and Goldman Sachs predicted tariffs on Chinese imports would begin pushing up the cost of goods such as household furnishings, apparel and communications equipment in May.
But Wells Fargo reckoned any price bumps would be blunted because many manufacturers and retailers stocked up on materials and products before tariffs took effect. The research firm also said many companies would absorb some of the costs or hold off on price increases as they await White House negotiations with foreign countries.
To allow for the talks, Trump paused high double-digit duties on dozens of countries for 90 days in April and similarly suspended triple-digit levies on China last month.
Still, U.S. tariffs overall have jumped from less than 3% in January to 30% on goods from China and 10% on shipments from other countries. Early this month, Trump doubled tariffs on all steel and aluminum imports to 50%.
A trade court blocked most of the fees two weeks ago but a higher court allowed them to stay in place while the administration appeals the ruling.
By year’s end, Barclays estimates the charges will drive overall inflation to 3.5% and the core measure to 3.8%.