The year-over-year inflation rate ticked up in May to 2.4% from 2.3%, less than expected and reversing this year’s cooling trend.
Economists expected the consumer price index to surge 2.5% in May from a year earlier.
Morgan Stanley expected the new consumer price index report to show evidence of “tariff-driven inflation,” given reports and surveys have shown recent and expected changes to prices. The Federal Reserve’s Beige Book, which collected information from businesses and others on or before May 23, said all 12 Federal Reserve Districts “indicated that higher tariff rates were putting upward pressure on costs and prices.”
President Donald Trump said the administration is “working to rapidly defeat inflation” and has repeatedly pushed the Fed to lower interest rates. Federal Open Market Committee members will meet next week to decide on their next rate move. CME FedWatch shows based on market trades, that there’s a strong chance rates will remain unchanged.
“If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment,” said Federal Reserve chair Jerome Powell at a May 7 press conference following the announcement that the Fed held interest rates steady.
Powell added that tariffs’ effects on inflation could be either short-lived or more persistent, depending on how high they are and how long it takes for the effects to show up in prices.
Tariff decisions have already affected business strategies and sales. Small-business owner Michael Salvatore told Business Insider that the legal whiplash with tariffs means more uncertainty. While there have been “serious discussions” about increasing prices at his business locations in Chicago, he said, “there’s only so much our customers can reasonably be expected to absorb,” and he doesn’t want to have to go back and forth on prices.
“As a small business owner, uncertainty is just as damaging as the tariffs themselves,” Salvatore said. “I can’t make clear purchasing decisions or long-term plans when I don’t know what rules I’m playing by.”
Hard economic data has stayed strong, including better-than-expected job growth, and even soft data is starting to improve. Changes to trade deals in May, such as the 90-day pause on many tariffs with China, could be playing a role.
On Monday, the Survey of Consumer Expectations from the Federal Reserve Bank of New York showed inflation expectations declined. New National Federation of Independent Business data showed small businesses were more optimistic in May after the index dropped the previous two months.
“Although optimism recovered slightly in May, uncertainty is still high among small business owners,” Bill Dunkelberg, NFIB’s chief economist, said. “While the economy will continue to stumble along until the major sources of uncertainty are resolved, owners reported more positive expectations on business conditions and sales growth.”
This is a developing story. Please check back for updates.
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