Inflation was more moderate than economists anticipated in May on fears of President Donald Trump’s tariffs raising prices on a wide range of products across the economy with sweeping taxes on many of America’s biggest trading partners. The president’s expansive tariff agenda has concerned economists about sending inflation back up as businesses pass the increased costs onto consumers, risking reversing progress in getting it back to 2%. Businesses have been warning for months that price increases are likely to combat tariffs.
But the U.S. has so far been able to avoid that issue with data reflecting the early period of the whiplash tariff pronouncements and drawbacks. Wednesday’s consumer price index showed prices only rose 0.1% from April to May and The lack of definitive data that prices are starting to jump is raising questions about the broadly expected increase in prices this summer will show up and how severe it will be. But economists are still wary that higher costs could still be coming.
“Lower shelter cost inflation, lower travel and leisure prices, lower energy prices and subdued food and core goods prices inflation led to a weaker than expected CPI print in May,” said Ey chief economist Gregory Daco. “Still, the effect of tariffs will become increasingly visible. Prices for products affected by tariffs as well as other unaffected goods and services prices will rise as businesses attempt to spread the pain and avoid goods-specific price surges in an environment of increased price sensitivity.” Prices also did rise for some types of goods that are exposed to tariffs like appliances and car parts.
A May survey of businesses by the Federal Reserve Bank of New York found most businesses said they had already passed at least some of the costs of tariffs onto consumers. That trend may escalate in the coming months as import taxes become unavoidable for companies and preexisting inventories run out. Consumers have also been more and services in more recent government data.
Spending growth slowed sharply in April overall with more growth in services like housing, utilities and health care — essential costs — and less on cars, clothing and durable goods. Combined with an increased savings rate, economists see the changing spending habits as a sign of greater caution and sensitivity to prices from consumers. Many businesses also rushed to blunt the immediate impacts of the tariffs by stocking up on their products before they kicked in to save costs in the future and allow them to delay increasing prices and to keep the biggest rates from taking effect.
“While some observers are dancing to the tune of announced tariff rollbacks in recent weeks, we stress that the arc of reality has been bent,” Daco said. “With firms likely having front-loaded imports before the tariffs and CPI data tending to lag by one to two months, we should prepare for a muggy summer of price increases.” The White House has also scaled back some of the most aggressive tariffs that were announced during Trump’s “Liberation Day” for the administration to work out trade deals with dozens of countries that has lessened some of the blow. But tariffs are still significantly higher than they were before Trump returned to office even at the adjusted rate and taxes on things like foreign vehicles and auto parts, and on Chinese goods still threaten price pressures.
Trump came into office vowing to get inflation back on track through lower energy prices and a strong economy that would allow the Federal Reserve to lower interest rates that have been stuck in place since late last year. He and other members of his administration have piled pressure on the Fed to cut rates to help keep the economy on track and lower borrowing costs for consumers. “The president has been saying this for a while, but it’s even more clear: the refusal by the Fed to cut rates is monetary malpractice,” Vice President JD Vance wrote on X on Tuesday.
The administration’s wishes for interest rates are considered unlikely to become reality soon with the Federal Open Markets Committee’s next meeting scheduled for next week. Economists are broadly expecting the Fed to stand pat while it digests the impact tariffs are having on the economy and consumer prices. Economists and Fed chair Jerome Powell have warned that it will be difficult to discern what price influences are from inflation or the countless other economic factors that can sway pressures.
The challenge of identifying what is keeping inflation elevated, along with it having been above the 2% target for four years, is keeping the central bank highly cautious.
