Core inflation in the United States rose by less than expected for the fourth consecutive month in May, suggesting that firms have, for now, largely absorbed the impact of increasing tariff-related costs rather than passing them on to consumers.
The core Consumer Price Index (excluding food and energy) increased by just 0.1% month-on-month, according to data released by the Bureau of Labor Statistics. Year-on-year, core inflation stood at 2.8%, continuing a downward trend that may offer some reassurance to policymakers.
Notably, prices for core goods remained flat. Both new and used vehicle prices declined, as did clothing. Meanwhile, energy service costs rose by a modest 0.2%, with declines in airfare and hotel rates contributing to the subdued overall inflation print.

Interest rate swaps now imply a 75% probability of a Federal Reserve rate cut by September, underscoring expectations of a more accommodative stance. This latest data reinforces the view that the effects of President Trump’s tariff regime have not yet been fully reflected in consumer prices. This may be due to delayed implementation of certain duties, corporate stockpiling ahead of anticipated price hikes, or firms choosing—thus far—to absorb the additional costs. Nonetheless, an uptick in core goods inflation over the coming months remains likely.

Indeed, inflation in tariff-sensitive categories is already emerging. Toy prices registered their highest increase since 2023, while large household appliances saw their steepest monthly rise in nearly five years.
Conversely, petrol prices—excluded from the core CPI—declined by 2.6%, helping to restrain the overall index. With inflation broadly contained and labour markets showing early signs of softening, the Fed is expected to maintain its policy rate at the upcoming June meeting. However, growing disinflationary pressures and weak consumer sentiment could increase the likelihood of a rate cut in the second half of the year.
Policymakers are unlikely to place too much emphasis on a single month’s data given recent volatility.

Despite subdued aggregate inflation, signs of sectoral divergence are emerging. Core services, particularly housing, remain sticky: shelter costs rose 0.3% for the second consecutive month. Leisure and travel-related services, however, declined, reflecting softer discretionary spending.
Treasury Secretary Scott Bessent, speaking before Congress, credited the administration’s trade policies for containing inflation, citing a “departure from decades-old orthodoxy” in global commerce.
Still, grocery prices continued to rise in select categories. Dairy prices were up 0.3% after falling in April, while cereal, seafood, and bacon also registered increases. Egg prices fell by nearly 3%, while beef prices continued to be supported by tight cattle supplies and strong demand.
Housing continues to be the dominant contributor to service inflation. Excluding housing and energy, service inflation rose 0.1%—a slower pace than in the previous month. Year-on-year, these categories rose 2.9%, suggesting inflation in non-essential services is moderating.
Retailers such as Walmart and Target, along with automakers like Ford and Subaru, have already warned of potential price increases in the months ahead. The Fed’s Beige Book indicated that price pressures remain “moderate” across most regions, although several expect “strong or substantial” increases going forward.

The medium-term outlook will depend heavily on the evolution of trade negotiations. A provisional US–China trade agreement has helped ease expectations for now, but any breakdown could lead to a sharper pass-through of costs to consumers and renewed inflationary pressures.
In parallel, the Fed is closely monitoring wage growth and labour market dynamics, which are central to assessing the path of future inflation. Real average hourly earnings rose by 1.4% year-on-year in May, suggesting that purchasing power is slowly recovering, albeit from a low base.
Overall, while May’s inflation data offer some breathing room, uncertainty surrounding trade policy, consumer sentiment, and labour market strength leaves the door open for further volatility—and challenges for US monetary policy.