US May inflation rises 10 bps to 2.4%; on tariff impact

12 Jun 2025 , 04:44 PM

US INFLATION SHOWS FIRST SIGNS OF TARIFF IMPACT

Even before the CPI inflation was announced, experts had already warned that May inflation could see the first signs of reciprocal tariffs. Remember, currently only tariffs on China are operational, and the tariffs on all other countries are on hold till July 09, 2025. The fear was that once the scope of the tariffs were expanded, the inflation impact could be 25 bps to 30 bps overall. However, the first signs of the tariff impact were visible in May 2025, with most of the pressure coming from food inflation. That is something that was expected since Chinese imports impact that particular basket quite deeply. In a recent speech, Governor Adriana Kugler had also admitted that the full scope of tariffs had upside risks for inflation and downside risks for jobs and GDP growth. One has to wait and watch.

CORE INFLATION FLAT, PRESSURE COMES FROM FOOD BASKET

The food inflation in May saw the tariff impact as it scaled up by 10 bps to 2.9%. There was some pressure from the energy basket too. Here is the full picture.

Inflation Basket Category	May 2025 (YOY)	Apr 2025 (YOY)	Inflation Basket Category	May 2025 (YOY)	Apr 2025 (YOY)
Food Inflation	2.90%	2.80%	Core Inflation	2.80%	2.80%
Food at home	2.20%	2.00%	Commodities less food and energy	0.30%	0.10%
·          Cereals and bakery products	1.00%	0.00%	·          Apparel	-0.90%	-0.70%
·          Meats, poultry, fish, and eggs	6.10%	7.00%	·          New vehicles	0.50%	0.30%
·          Dairy and related products	1.70%	1.60%	·          Used cars and trucks	1.80%	1.50%
·          Fruits and vegetables	-0.50%	-0.90%	·          Medical care commodities	0.30%	1.00%
·          Non-alcoholic beverages	3.10%	3.20%	·          Alcoholic beverages	1.50%	1.80%
·          Other food at home	1.40%	0.70%	·          Tobacco and smoking products	6.30%	7.10%
Food away from home	3.80%	3.90%	Services less energy services	3.60%	3.60%
·          Full service meals and snacks	4.20%	4.30%	Shelter	3.90%	4.00%
·          Limited service meals	3.50%	3.40%	·          Rent of primary residence	3.80%	4.00%
Energy Inflation	-3.50%	-3.70%	·          Owners’ equivalent rent	4.20%	4.30%
Energy commodities	-11.60%	-11.50%	Medical Care Services	3.00%	3.10%
·          Fuel oil	-8.60%	-9.60%	·          Physician Services	2.90%	3.10%
·          Gasoline (all types)	-12.00%	-11.80%	·          Hospital Services	3.60%	3.60%
Energy services	6.80%	6.20%	Transport Services	2.80%	2.50%
·          Electricity	4.50%	3.60%	·          Motor vehicle Maintenance	5.10%	5.60%
·          Natural gas (piped)	15.30%	15.70%	·          Motor vehicle insurance	7.00%	6.40%
Headline Consumer Inflation	2.40%	2.30%	·          Airline Fare	-7.30%	-7.90%

Data Source: US Bureau of Labor Statistics

In the US, Fed policy is based on PCE inflation. However, CPI inflation sets the tone for PCE inflation later in the month. Here are some takeaways.

• Food inflation in May was up 10 bps to 2.9%. Downward pressure came from Meat, Poultry, Egg, Fish; offset by spike in cereals, fruits, vegetables, and other food at home.
• Energy inflation in May 2025 hardened 20 bps to -3.5%. Downward pressure again came from gasoline and piped gas; offset by a spike in electricity and fuel oil.
• Core inflation in April was flat at 2.8%. Downward pressure came from used cars, medical care, tobacco; offset by spike in new vehicles, motor insurance, and air fares.

The rise in inflation is marginal; but is an indicator of how things could evolve on the price front, if full reciprocal tariffs are implemented.

MAY 2025 MOM INFLATION TAPERS TO 0.1%

Here is the month-on-month (MOM) inflation for last 6 months.

Month	Food (MOM)	Energy (MOM)	Core (MOM)	Headline (MOM)
Dec 2024	0.3%	2.6%	0.2%	0.4%
Jan 2025	0.4%	1.1%	0.3%	0.5%
Feb 2025	0.2%	0.2%	0.2%	0.2%
Mar 2025	0.4%	(2.4)%	0.1%	(0.1)%
Apr 2025	(0.1)%	0.7%	0.2%	0.2%
May 2025	0.3%	-1.0%	0.1%	0.1%

Data Source: US BLS (negative figures in brackets)

The headline MOM inflation for May 2025 tapered 10 bps to 0.1%. The trends from MOM inflation are a lot more pronounced and pointed. The MOM trend shows a sharp spike in high frequency food price inflation, sobering of core inflation and a sharp fall in energy inflation. It is also a precursor of what the full impact of reciprocal tariffs could mean for high frequency inflation.

CME FEDWATCH – RATE TRAJECTORY BROADLY THE SAME

Here is how the CME Fedwatch probabilities (based on implied Fed Futures trades) look after US BLS published May 2025 CPI inflation.

Fed Meet	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450	450-475
Jun-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	99.8%	0.2%
Jul-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	18.6%	81.3%	1.1%
Sep-25	Nil	Nil	Nil	Nil	Nil	Nil	12.0%	59.1%	28.8%	Nil
Oct-25	Nil	Nil	Nil	Nil	Nil	6.4%	37.0%	43.4%	13.3%	Nil
Dec-25	Nil	Nil	Nil	Nil	4.1%	26.3%	41.1%	23.7%	4.6%	Nil
Jun-26	0.1%	1.2%	6.2%	17.1%	27.7%	26.9%	15.4%	4.7%	0.6%	Nil
Dec-26	1.6%	5.2%	13.1%	22.4%	25.8%	19.7%	9.4%	2.5%	0.3%	Nil

Data source: CME Fedwatch

The higher inflation has not changed the expectations very much; as the CME Fedwatch does not expect rate cuts in June and July Fed meetings.

• The first rate cut in 2025 looks likely only in Sep-25, with probability of 71.2%.
• By Dec-25, probability of 50 bps rate cut remains fairly high at 71.7%.
• By Jun-26, probability of minimum 75 bps rate cut is at 79.3%.
• By Dec-26, probability of minimum 75 bps rate cut is up marginally at 87.8%.

As of now, it looks like the Fed will cut rates by 50 bps overall in 2025; in 2 tranches in September and December. However, it appears there will only be 1 rate cut of 25 bps in 2026. A lot will depend on how tariffs pan out, and how the FOMC interprets it!