The US consumer inflation data for May 2025, released on Wednesday, showed a slight and unexpected easing, prompting brief optimism among analysts. However, the broader consensus remains that the Federal Reserve is unlikely to change its rate policy based on this one report, particularly as underlying inflation pressures persist.

A Softer CPI Surprise

The Consumer Price Index (CPI) rose 2.4% year-on-year in May, just under the 2.5% forecast. Month-on-month, CPI climbed only 0.1%, lower than the expected 0.2%, thanks to declining gasoline prices offsetting rising shelter costs.

Core CPI, which excludes volatile food and energy prices, also came in softer-than-expected at 0.1% monthly, although the annual pace held steady at 2.8%.

This subdued CPI reading surprised many economists, especially given the inflationary risks tied to President Donald Trump’s recent sweeping tariffs.

“Overall, today’s report was a bit of a surprise,” said Ali Jaffery, economist at CIBC.

Core PCE Still a Concern

Despite the headline CPI softness, attention quickly turned to the core Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred inflation gauge.

Nomura’s economist Aichi Amemiya pointed out that several components that carry more weight in the PCE index — like newspapers, magazines, and prescription drugs — actually rose significantly in May.

“We expect core PCE goods inflation likely remained relatively high,” Amemiya said. “Also, food service inflation, not included in core CPI but part of core PCE, came in stronger than expected.”

These price increases in PCE-heavy categories could mean that despite the soft CPI, the PCE figure may show more persistence, leaving the Fed hesitant to act on rate cuts.

Tariffs Likely to Lift Prices Over Time

David Doyle, chief economist at Macquarie, noted that Trump’s tariffs would likely exert upward pressure on prices through the second half of the year.

“We expect YoY core inflation to remain elevated and potentially rise as price pressures flow from recent tariff implementation,” Doyle said.

Tariffs have historically had delayed effects, and economists believe that the pass-through to final goods pricing could accelerate over the next several months.

What This Means for the Federal Reserve

Despite the slightly encouraging CPI data, the consensus view is that the Federal Reserve’s policy trajectory remains unchanged for now.

“The softer pace of May inflation is good news for the Fed but it doesn’t change the calculus,” said Ali Jaffery.

“They still need to wait and see how the economy and job market respond, where tariffs settle, and what fiscal policy looks like.”

UBS’s Brian Rose echoed the sentiment, adding that although recent inflation prints have softened, the labour market still appears strong.

“The Fed will need to see weaker labour market data to resume rate cuts,” he said. UBS forecasts 100 basis points of rate cuts starting in September, though Rose cautioned that solid payroll growth and rising inflation from tariffs could delay such moves.

Service Sector and Core Goods Inflation Persist

Analysts also noted that opportunistic pricing, especially in the service sector, remains a threat to disinflation trends.

“Core goods prices will have to start to rise,” Jaffery added. “But the slowing economy may keep service inflation in check more than during the previous tariff episode or the pandemic.”

With the US economy still navigating the aftershocks of trade policy, any relief on inflation is likely to be short-term unless underlying costs in housing, healthcare, and services start moderating.

Market Implications and Investment Strategies

Investors were initially hopeful that the soft CPI might signal a near-term rate cut, but as experts caution, the Fed’s cautious approach remains unchanged.

The FOMC meeting next week is expected to keep rates steady, with close scrutiny of upcoming labour data and PCE figures.

While inflation appears somewhat contained for now, analysts and economists warn that core pricing pressures, global trade dynamics, and wage costs will determine whether the Fed pivots later this year.

Conclusion

The May CPI report offers a glimmer of hope for those expecting disinflation, but it’s unlikely to move the Fed’s policy needle at this stage.

The real test lies ahead — in the form of labour market data, PCE inflation, and how tariff-driven costs flow through the economy.

Until then, policymakers are expected to hold steady, waiting for more decisive trends before triggering any monetary easing.

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