Soft CPI for May shows tariffs not yet overwhelming

The first inflation reading for May should be heartening, if not a little befuddling to policymakers with CPI coming in much softer than expected. May’s reading was, so far, the biggest test about the speed and magnitude to which tariffs are affecting consumer prices, and core goods prices overall showed little signs of firmness. The lack of tariff effects could plausibly reflect the front loading of inventories and attempts to push out price increases for as long as possible while firms wait to see how trade policy shakes out. Though trade rhetoric has de-escalated since Liberation Day, tariffs rates are much higher (as are customs revenues), so someone is eating the cost. This implies that domestic margins are likely being squeezed a bit. Still, inventory accumulation has slowed and eventually retailers will need to restock at higher prices. We expect to see the inflationary effects ramp up more in the coming months as the higher tariff environment persists. However, if passthrough ahead is muted, this could lower the bar for the labor weakness needed for the Fed to resume the cutting cycle.