US Inflation in focus: will CPI provide further relief?

US inflation is expected to have risen slightly in May but the data could be distorted by tariffs
By Daniela Hathorn and Kyle Rodda

As the U.S. prepares to release its May CPI report this week, investor attention is sharply focused on inflation dynamics and what they might signal for the Federal Reserve’s policy path. The data is widely considered the key macro event on the calendar, with broad implications for currency, equity, and bond markets.

Expectations: A Modest Uptick

Economists forecast a rise in headline CPI from 2.3% to 2.5%, while core CPI is expected to tick higher from 2.8% to 2.9%. A slight increase in the monthly print is also projected.

This reinforces the narrative of ongoing resilience in the U.S. economy. However, the debate remains: is this true economic strength, or are we seeing distortions caused by trade barriers? The Federal Reserve has previously warned that newly implemented tariffs could artificially push prices higher in the short term.

Several companies have reportedly front-loaded orders and accelerated spending to get ahead of tariff enforcement deadlines. While this behaviour may temporarily boost economic activity, it could also skew inflation data, making the Fed’s job significantly more complicated.

The central question: how much of this inflation is structural versus transitory? The Fed may be reluctant to interpret the data at face value given the influence of U.S. trade policy and political developments.

Inflation breakdown to be key

While CPI garners headline attention, the Fed’s preferred measure is the PCE price index. That said, CPI remains closely watched by markets and often leads PCE by several basis points. Even a minor overshoot or undershoot in CPI could move asset prices significantly.

Much of the inflation persistence to date has been in the services sector, reflecting steady consumer demand. However, the goods segment will be crucial this time. Goods prices are more exposed to tariffs, and any sign of price passthrough will be closely scrutinized.

It's important to note that tariffs are not inherently inflationary—they represent a one-time price shock. But they introduce noise into inflation readings and could influence expectations, potentially un-anchoring them and entrenching inflation at higher levels.

Market reaction

A cooler-than-expected CPI reading could deliver a market-friendly outcome:

  • Equities: May find room to rally on renewed hopes of rate cuts later this year.
  • Dollar: Could weaken modestly as rate cut odds increase.
  • Fed Expectations: A soft print may give the Fed confidence that its inflation mandate remains intact despite tariff noise.

If inflation shows signs of easing, despite the expected tariff-driven distortions, it could ease policy uncertainty and reinvigorate risk sentiment.

Conversely, a hot reading will reinforce the Fed’s cautious stance, especially given the still-stable labour market, which gives policymakers room to stay on hold. This could increase concerns about stagflation, which would dampen sentiment on US assets.

While headline risk from trade developments remains unpredictable, the CPI report is the most pivotal scheduled data point of the week, and likely to be the market’s main driver—unless major geopolitical or trade headlines emerge.

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