U.S. CPI readings for May were once again lighter than forecasted, with U.S. headline CPI up +0.1% month-over-month (MoM) and up +2.4% year-over-year (YoY) versus consensus expectations for +0.2% and +2.4%, respectively. Core CPI was even more surprising, up only +0.1% MoM and up +2.8% YoY while economists were expecting +0.3% and +2.9%, respectively; this represents a deceleration from April even against the backdrop of higher tariffs.
Shelter remains the primary driver of inflation for U.S. consumers. The broad shelter index was up +0.3% month-over-month with rent up +0.2% and owners’ equivalent rent up +0.3%. However, this reflects meaningful improvement, as rent prices grew at their slowest pace since 2021 and owners’ equivalent rent was at its lowest level since November 2024. Energy prices were lower in the month, with gasoline down -2.6%, which helped to act as an offset to an increase of +0.3% in food prices, reversing last month’s decline. Airfares were lower once again, down -2.7%, but motor vehicle insurance was up +0.7%. Most notably, however, were lower prices in goods, expected to be higher on the back of announced (and collected!) tariffs. New and used cars and trucks, apparel, and furniture and bedding all posted month-over-month price declines.
U.S. equity futures were down coming into the print but rebounded into positive territory after the release. Not surprisingly, both the U.S. dollar and Treasury yields broke lower on the news as well. Combining today’s inflation read with last week’s jobs data, it is hardly surprising in our view that expectations for a Fed rate cut in September rose above a 75% probability, up markedly from around 60% coming into today’s news. The data released over the last several weeks – both hard and soft – make next week’s Fed meeting even more interesting, as calls for the Fed to make a move on rates are growing louder – even outside of the usual suspects.
However, the caveat to all of this is that the higher prices from tariffs will take time to transmit through the economy. One needs to look no further back than 2020 for evidence of this lag, and the members of the Federal Open Market Committee (FOMC) are loathe to ignore the recent past as they weigh policy changes. To be fair, it is unclear the level of pricing power companies have at this juncture given how much prices have risen already since 2020. There was also a meaningful build-up in inventories that are affording companies some time to consider their ability to pass through the tariffs. Regardless of the timing, however, the reality is that softer prints over the last several months are pressuring lower inflation expectations for the back half of the year, and peak headline CPI could be closer to +3% than +3.5% by the end of the year.
As for the remainder of this week, worth watching ahead of the Fed meeting are two important Treasury auctions: $39 billion in 10-year bonds will be on offer today while the Treasury will try to place $22 billion in much maligned 30-years tomorrow. Investors are also reacting to this morning’s announcement of a preliminary agreement between the U.S. and China involving rare earth metals and advanced technology, although details at the time of this writing are limited. We continue to advise our clients to take advantage of any volatility in the coming weeks to move towards longer-term strategic allocations, with a focus on allocating outsized cash positions into long-term allocations in short to intermediate duration fixed income and diversified equities.
