Inflation quiet despite tariffs
US consumer inflation in May remained mild. For the third month in a row, the core CPI rose 2.8% year-over-year. This was also slightly below the consensus estimate of 2.9%. This suggests the Fed’s progress in combating inflation has stalled and at the same time, that the tariffs are having only a small (and less-than-feared) impact. Overall, though, this does not materially change the economic picture—the economy continues to grow, albeit more slowly than last year, and aggregate demand is no longer outstripping supply as it was in 2022 and 2023.
Inflation currently seems stuck at that 2.8% rate, although 1-month and 3-month annualized inflation of 1.6% and 1.7%, respectively, suggest it can still fall further in the coming months and quarters. The Fed always has the option of resuming hikes if they think the economy needs more assistance bringing inflation back to target, but we think they’d much prefer to allow their recently restrictive policy to flow through and to see how much the economy continues to decelerate. With progress limited in bringing inflation the final stretch of the way back toward the Fed’s target—and with the impact of tariffs and geopolitical uncertainty still unknown—we continue to expect the Fed to hold rates steady in upcoming meetings, with cuts likely beginning again in late Q3. Without further progress in the inflation fight or a weakening labor market, it’s hard to make the case for renewed interest in rate cuts. At the same time, while progress on inflation has stalled, any near-term upward reversion in inflation would likely be caused by tariffs and we’d expect the Fed to look through those, suggesting the balance of risks remains toward cuts.
As we look at the economy for the rest of the year and even into 2026, our attention has shifted recently from the focus on decelerating inflation and toward the labor market instead. We’re back to something resembling a more normal business cycle—with the cascading effect of business decisions, potentially prompted by government policies and the uncertainty around them, being the greatest risk to the economy. That has our eyes now more focused on corporate commentary and hiring/firing decisions than on inflation and the Fed. Of course, exogenous shocks could also materialize, but by their nature, they’re unpredictable. Overall, the economy remains decently on track.
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