US consumer prices rise in May; inflation expected to accelerate

US consumer prices increased less than expected in May as cheaper gasoline partially offset higher rents, but inflation is expected to accelerate in the coming months on the back of the Trump administration’s import tariffs.

The report from the labour Department also showed underlying price pressures muted last month. Economists say inflation has been slow to respond to President Donald Trump’s sweeping tariffs as most retailers are still selling merchandise accumulated before the import duties took effect.

Walmart last month said it would start raising prices in late May and June. Inflation was also being curbed by slower price rises for services, including subdued airline fares. The Federal Reserve is expected to keep interest rates unchanged next Wednesday, with financial markets optimistic of a resumption in monetary policy easing in September.

“This report is another indicator that, before tariffs and economic uncertainty, we were well on our way to inflation falling back to target and that the main impediment to future progress is tariff-related price increases,” said Daniel Hornung, a senior fellow at MIT.

The Consumer Price Index (CPI) increased 0.1 per cent last month after rising 0.2 per cent in April, the labour Department’s Bureau of labour Statistics (BLS) said. Economists polled by Reuters had forecast the CPI climbing 0.2 per cent.

A 0.3 per cent increase in the cost of shelter, mostly rents, was the main driver of the rise in the CPI. Food prices rebounded 0.3 per cent after dipping 0.1 per cent in April. Grocery store prices climbed 0.3 per cent, lifted by strong increases for cereals and bakery products as well as other food consumed at home.

Fruit and vegetable prices also rose, but consumers got some relief from a 2.7 per cent decline in the cost of eggs. Meat, fish, nonalcoholic beverages and dairy products also cost less relative to April. Gasoline prices dropped 2.6 per cent.

In the 12 months through May, the CPI advanced 2.4 per cent after gaining 2.3 per cent in April.

In addition to pre-tariffs inventory, economists say an uncertain demand environment was likely making some businesses hesitant to raise prices. Economists expect inflation to heat up from June and through the second half of the year and believe companies will raise prices incrementally to avoid a price shock for consumers and attracting the attention of the White House.

Trump last month told Walmart to “eat the tariffs” instead of raising prices. The administration has maintained that the duties, which are a tax, were paid by the exporting countries.

On Wednesday, Trump said a US-China trade deal was “done.” But duties on Chinese imports would still be way higher than they were in January.

Stocks on Wall Street rose. The dollar slipped against a basket of currencies. US Treasury yields fell.

Excluding the volatile food and energy components, the CPI gained 0.1 per cent. The so-called core CPI rose 0.2 per cent in April.

Shelter costs rose 0.3 per cent, with owners’ equivalent rent increasing 0.3 per cent. But the cost of hotel and motel rooms eased 0.1 per cent and airline fares dropped 2.7 per cent, signs of slowing demand.

Healthcare costs rose 0.3 per cent. Motor vehicle insurance increased 0.7 per cent and personal care costs rose 0.5 per cent. Overall, services costs gained 0.2 per cent after rising 0.4 per cent in April. Some economists are hopeful any tariff-related surge in inflation would be blunted by moderating services prices, especially wage growth.

“The economy is primarily a service sector economy and the biggest cost input is the cost of workers,” said James Knightley, chief international economist at ING. “A cooling jobs market implies that this too will help to mitigate the tariff impact.”

Prices for household furnishings and operations rose 0.3 per cent. Used cars and trucks prices decreased 0.5 per cent while those for new vehicles eased 0.3 per cent. Apparel prices slipped 0.4 per cent.

But there were some pockets of tariff-related increases. Prices for major appliances soared 4.3 per cent, the biggest gain since August 2020, likely reflecting the first round of steel and aluminium duties. Toy prices jumped 1.3 per cent, the largest increase since February 2023.

Prescription medication prices increased 0.6 per cent. Overall core goods prices were unchanged after gaining 0.1 per cent in April.

In the 12 months through May, the core CPI inflation increased 2.8 per cent after rising 2.8 per cent in April. The Fed tracks different inflation gauges, including the core Personal Consumption Expenditures (PCE) price index, for its 2 per cent target. Economists estimated core PCE inflation rose 0.2 per cent in May after edging up 0.1 per cent in April.

Reuters