May CPI: Tariffs not yet enough to upset the inflation cart

Summary

Today's CPI report is unambiguously good news for the FOMC. Headline CPI increased 0.1% in May and 2.4% over the past year, still comfortably below the 3.5%-4.0% nominal wage growth the average worker has seen over the past year. Core CPI also rose just 0.1% in May, below consensus expectations and led lower by softer-than-anticipated readings for both core goods and core services prices. The 1.7% annualized increase in the core CPI over the past three months matches the slowest pace of three-month core inflation that has occurred since price growth shot above 2% in early 2021.

That said, we believe it is too early to declare victory and say that the significant increase in tariffs over the past few months will have no material impact on consumer price growth. Most of the tariff increases occurred over the March-May period, and we doubt enough time has elapsed for the full effects of these policy changes to be felt on output, hiring and pricing. We still look for the core CPI to rise to a little over 3% the next few quarters, largely due to higher tariffs. But for now, the FOMC will likely be content to stand pat at its meeting next week and await the next round of economic data before altering its monetary policy stance.

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