May CPI preview: Test of tariffs
|Summary
May's CPI report will be an important test of the speed and magnitude to which higher tariff rates are being passed along to the consumer. We expect to see only a moderate advance in headline CPI (0.15%) in May as gasoline prices fell on a seasonally adjusted basis and food inflation appeared tame. But excluding food and energy, inflation looks to have firmed on the back of higher goods prices. We estimate the core CPI rose 0.27% in May.
Front-loading of inventories and efforts to avoid alienating customers—especially as it remains to be seen where tariff rates eventually land—are mitigating the early effects of higher import duties on consumer prices. That said, we expect to see the inflationary effects ramp up more in the coming months as the higher tariff environment persists. We estimate core CPI will advance at an average monthly pace of 0.30% in the second half of the year, which would push the year-over-year rate back up to 3.3% in Q4 from April's year-over-year rate of 2.8%.
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