The annual inflation rate exhibited a slight increase in May, driven by a rise in grocery prices that offset declines in gasoline costs, according to the Bureau of Labor Statistics (BLS).
Despite a relatively stable inflation environment, economists have warned that President Trump’s tariff policies may contribute to rising consumer prices in the upcoming months, with some early effects already evident.
The consumer price index (CPI), a key indicator of inflation, showed a 2.4% rise in the 12 months leading up to May, a small increase from 2.3% in April, the BLS reported on Wednesday.
‘Calm before the inflation storm’
The increase in the annual inflation rate was significantly influenced by a statistical phenomenon known as “base effects,” which occurs when comparing current data with atypically low figures from the previous year—for May 2024, these figures were notably subdued.
In contrast, the monthly inflation rate provides a clearer perspective on ongoing trends, with the CPI rising by 0.1% from April to May, a decrease from the 0.2% increase observed the month prior, according to the BLS.
Economists suggest that a consistent monthly inflation rate of around 0.2% would be sufficient to align inflation with the Federal Reserve’s target in the long term.
“This report is quite positive,” said Mark Zandi, chief economist at Moody’s. “Inflation has notably returned to align with the Federal Reserve’s annual target.”
However, Zandi warned that the tariffs imposed by President Trump on various products are expected to become more noticeable in the summer and fall months.
“This appears to be the calm before an inflation storm,” he stated. “The report reflects lingering disinflation that has been underway for several years.”
Tariff impact on energy prices
Nonetheless, economists noted that tariffs had already influenced consumer prices as of May.
Specifically, gasoline prices exhibited a nearly 3% decline from April to May and are down 12% compared to a year ago, according to the BLS.
This trend is primarily attributed to shrinking oil prices, which are seen as a response to fears regarding a potential slowdown in global economic growth due to tariffs, explained Bernard Yaros, lead U.S. economist at Oxford Economics.
Lower energy prices have cascading effects, leading to reductions in gasoline and household energy bills, Yaros noted. Additionally, decreased oil prices are reflected in broader transportation costs, including airfares, which fell by approximately 3% from April to May and have decreased 7% year-on-year, according to the BLS.
Conversely, grocery prices remained a concern in May, with food at home prices rising 0.3%, recovering from a 0.4% decrease in the previous month, economists pointed out.
Zandi remarked that food prices evoke “a bit of anxiety,” highlighting them as one of his main concerns.
Other disinflationary factors
Recovering supply chains and a softening labor market have played significant roles in moderating U.S. inflation, according to Sarah House, a senior economist at Wells Fargo Economics.
House noted that consumers are still spending and have not shown a significant hesitation to accept price increases. “The consumer hasn’t buckled yet,” she said.
Additionally, the moderation of housing inflation is a critical factor, given that it constitutes a major component of the consumer price index. Monthly inflation rates for rent and “owners’ equivalent rent,” a measure for homeowners, have returned to pre-pandemic levels, noted Stephen Brown, deputy chief North America economist at Capital Economics, in a research note on Wednesday.
According to Yaros from Oxford Economics, these trends suggest a consistent downtrend in inflation that may reach the Federal Reserve’s long-term target by year-end or early next year.
Tariff risk ‘stalling out’ disinflation
However, the imposition of tariffs complicates this scenario, economists cautioned.
“The disinflationary trends that we have observed could be at risk of stagnation,” House remarked.
Since taking office, President Trump has enacted substantial tariffs impacting various imports.
Current federal data indicates that the effective tariff rate stood at approximately 6% in April, a figure likely to rise, contrasting sharply with a mere 2% rate recorded at the end of 2024, according to House.
The Yale Budget Lab projects that the average U.S. household might incur an additional $2,500 expense in 2025 as a consequence of the tariffs set to take effect as of June 1.
A federal appeals court has determined that certain tariffs may continue while it reviews a lower court decision aimed at blocking them. This includes a 10% tariff imposed on a majority of U.S. trading partners, alongside additional duties on Mexico, Canada, and China linked to alleged fentanyl trafficking.
Moreover, there are significant tariffs on specific goods, such as a 50% levy on steel and aluminum, as well as a 25% tax on imported vehicles and parts. China also faces additional tariffs on its exports to the U.S., although officials from both countries indicated that progress has been made in trade discussions.
According to Brown of Capital Economics, recent CPI data suggests that the price hikes related to tariffs are not yet significantly impacting consumers.
Nonetheless, economists anticipate this to change in the forthcoming months.
They argue that businesses may have been able to mitigate some price increases through inventory buildup prior to the imposition of tariffs, suggesting those goods were acquired at pre-tariff prices—a buffer that is unlikely to last indefinitely.
There have been initial indications of tariff impacts in the May CPI report, particularly for those observing closely, according to Brown. For instance, the prices of major appliances surged by 4.3% within the month, and toy prices increased by 2.2%, based on CPI statistics.
Economists such as Elizabeth Renter from NerdWallet have noted, “Unless all retailers are implementing price increases simultaneously, the effects may gradually emerge rather than flood the overall data.”
