US inflation rises modestly in May, fuelling debate over rate cuts

US consumer prices edged up slightly in May, suggesting inflation pressures remain mild despite ongoing trade tensions and political pressure on the Federal Reserve to ease monetary policy.

The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.1 per cent on a seasonally adjusted basis in May, following a 0.2 per cent increase in April, the Bureau of Labor Statistics (BLS) reported on June 11.

On an annual basis, inflation ticked up to 2.4 per cent, up slightly from 2.3 per cent in April but below consensus forecasts of 2.5 per cent.

Stripping out volatile food and energy prices, the core CPI also rose just 0.1 per cent month-over-month—the softest reading in Bloomberg’s survey of 73 economists. Core inflation held steady at 2.8 per cent year-on-year, matching April’s pace and marking the lowest level since early 2021.

Shelter and food drive the rise

The monthly increase in prices was primarily driven by a 0.3 per cent rise in shelter costs, which include rent and owners' equivalent rent. Food prices also increased 0.3 per cent in May, with grocery and restaurant prices rising in tandem.

The food at home index climbed 0.3 per cent, driven by a sharp 1.1 per cent gain in cereals and bakery products. Egg prices fell 2.7 per cent on the month but remained up 41.5 per cent over the past year.

In contrast, energy prices dragged overall inflation lower. The energy index declined 1.0 per cent in May, led by a 2.6 per cent drop in gasoline prices. On a 12-month basis, energy prices fell 3.5 per cent, with gasoline down a notable 12.0 per cent.

Other categories showing monthly price declines included airline fares (-2.7 per cent), apparel (-0.4 per cent), and both new and used vehicles, which dropped 0.3 per cent and 0.5 per cent, respectively.

Markets cheer softer-than-expected reading

The cooler-than-expected inflation data lifted investor sentiment. US stock futures rose, with the S&P 500 up 0.4 per cent, Nasdaq futures gaining 0.5 per cent, and Dow futures climbing 130 points. Treasury yields slipped, reflecting increased market bets that the Federal Reserve could cut interest rates later this year.

The inflation report comes days before the Fed’s June 17-18 policy meeting, where the central bank will release updated economic projections and its closely watched dot plot.

Despite political pressure from President Donald Trump and Vice President JD Vance, Fed Chair Jerome Powell has emphasised that rate cuts will depend on “sustained evidence” of disinflation.

“The refusal by the Fed to cut rates is monetary malpractice,” Vance posted on X, echoing Trump’s calls for looser policy amid easing inflation and rising tariffs.

Tariff effects are yet to show up fully

Although Trump’s latest round of tariffs took effect in April, economists noted that their impact on consumer prices may be delayed. Many companies appear to be absorbing higher import costs or drawing down inventories rather than passing costs to consumers.

Negotiations with China continue, with President Trump claiming an “excellent” trade relationship and announcing that China will supply rare earths upfront as part of a pending agreement. Meanwhile, the US has imposed a 55 per cent tariff on some Chinese goods, while China will apply a 10 per cent rate in return.

Adding to uncertainty, recent changes in CPI data methodology, including the use of vendor-sourced transaction data for leased vehicle prices and expanded imputation due to staffing shortages, may introduce more volatility into future readings.

With inflation cooling but not collapsing and trade policy still evolving, the Fed faces a delicate balancing act heading into the second half of the year. For now, markets are pricing in at least two rate cuts in 2025, but much will hinge on whether the recent disinflation trend holds.