U.S. Inflation Cools in May as Energy and Core Prices Fall, Supporting Dovish Fed

U.S. CPI Slows in May as Energy and Core Goods Weaken

U.S. consumer inflation came in below expectations in May, with price gains cooling despite ongoing trade tensions and tariffs. The latest Consumer Price Index (CPI) data released by the Bureau of Labor Statistics showed a 0.1% rise month-over-month, under the 0.2% forecast. On a year-over-year basis, inflation stood at 2.4%, matching estimates.

Core CPI Lags Forecasts as Vehicle, Apparel Prices Fall

The core CPI—excluding food and energy—also rose 0.1% in May, below the 0.3% consensus, and posted a 2.8% annual gain, slightly under the expected 2.9%. Notably, categories typically sensitive to tariffs, such as vehicles and apparel, saw price declines. Used cars and trucks dropped 0.5%, new vehicles slid 0.3%, and apparel was down 0.4%. These declines helped offset increases in categories like medical care and shelter, with the latter rising 0.3% for the month and contributing significantly to the overall CPI increase.

Energy Index Down 1% as Gasoline and Natural Gas Weaken

The energy index was a key drag on headline inflation, falling 1.0% in May. Gasoline prices fell 2.6%, while natural gas declined 1.0%. On a 12-month basis, energy prices are down 3.5%, driven largely by a 12% drop in gasoline and an 8.6% decline in fuel oil. Electricity, in contrast, increased 0.9% in May and 4.5% over the year. The softness in energy may provide relief for consumers but could suppress inflation expectations.

Food and Shelter Support Headline CPI

The food index rose 0.3% in May, rebounding from a 0.1% decline in April. Both food at home and food away from home increased by 0.3%, with full-service and limited-service meals contributing evenly. Over the past year, food prices climbed 2.9%, with sharp gains in eggs (+41.5%) and meat categories supporting the uptrend. Shelter, which accounts for a large share of the CPI basket, continued its steady climb, up 0.3% monthly and 3.9% annually.

Fed Outlook: Inflation Pressure Contained, Eyes on Tariffs

The weaker-than-expected core CPI print supports the Federal Reserve’s cautious stance on rates, especially with tariffs yet to exert broad pricing pressure. Recent comments from Fed officials suggest concern over potential future inflation from trade policy, but so far, the data shows muted pass-through. Market pricing may shift slightly more dovish as the Fed evaluates risks to growth and price stability.

Market Forecast: Slightly Bullish for Bonds, Neutral for Dollar

With inflation undershooting expectations, traders may find support for Treasuries in the near term, pushing yields lower. The dollar is likely to remain range-bound as the Fed’s rate path remains data-dependent. Equity markets may interpret the data positively, expecting sustained consumer spending with limited cost pressure.