It’s premature to assume that tariffs won’t push up inflation, but the developments have been pretty encouraging thus far. Inflation worrywarts (including yours truly) appear to have overestimated the degree to which companies would rush to raise prices in an environment of ever-changing trade policy and softening consumer demand. Odds are that we’ll still get some rocky inflation reports over the summer, but I’m less inclined to believe that they’ll lead to unanchored inflation expectations and sustainably higher interest rates.
Nearly five months into the tariff upheaval, the Bureau of Labor Statistics reported Wednesday that the core consumer price index — excluding volatile food and energy — rose 2.8% in May from a year earlier. On a seasonally adjusted basis, core CPI rose just 0.1% in May from April, bringing the three-month annualized pace of core CPI to an extremely benign 1.7% pace. In part, these results reflect the underlying disinflation trend that the Federal Reserve set in motion from 2022-2024 (housing inflation in particular continues to cool). Another part of the story reflects executives’ extreme uncertainty about the destination of trade policy. No one can tell what Trump’s endgame is, so they’re avoiding locking themselves into big price changes.
“It might just be my own personal theory that no one believes this is going to happen,” my colleague Allison Schrager said Wednesday on our livestreamed reaction to the numbers. “Tariffs are just too economically destructive and make so little sense.” The feeling that this whole thing is a moving target was further reinforced by the news that a trade framework with China has been completed and that tariffs on the world’s factory wouldn’t go back up from current levels, which Trump has characterized as a 55% rate (including a 10% baseline, a 20% charge related to fentanyl and 25% from other levies.)
But one of the biggest considerations here seems to be a broader softening in the economy, which is hardly something to celebrate.
Core services rose less than 0.2% in May from the previous month, the smallest increase since 2021 aside from the ultra-cool print in March. A big chunk of that came from easing housing inflation (an idiosyncratic story that we’ve discussed at great length). Services disinflation also got help from weak airfares, hotels and admissions to events. In a nutshell, consumption categories that aren’t dependent on imports are flashing signs of souring demand — perhaps in part due to tariff anxiety itself.
Import-heavy categories were somewhat mixed, but we aren’t out of the woods yet. Most notably, new vehicle prices fell 0.3% in May as seasonally adjusted auto sales plummeted 9.4% from the previous month, the biggest drop since 2022. Year-over-year sales are down very modestly, but they suggest that consumers are running low on enthusiasm, beleaguered by the tariff whiplash, high interest rates and a general sense that cars have become less affordable. Meanwhile, retailers sensing the weak consumer mood have been holding off on price hikes as long as possible. Cox Automotive’s second-quarter index of dealer sentiment fell to 45 from 58, suggesting that most dealers expect weakness over the next three months.
March and April data were somewhat flattered by consumers and businesses “front-running” — essentially trying to lock in purchases before expected tariffs hit. In that sense, May represented the initial comedown from a sugar high of sorts, and we’ll have to watch closely to see if consumption returns to just so-so or collapses.
Of course, it’s still quite possible that several core goods prices, including cars, will rise over the summer. Cox senior economist Charlie Chesbrough has written that prices should move higher as car dealerships work through what’s left of their existing inventory and start to bring in more tariffed vehicles. Walmart Inc., which is the world’s largest company by revenue and relentlessly advertises its “everyday low prices,” said in mid-May that it planned to raise prices. The effects of that move still loom, despite a direct rebuke from President Trump. What’s less certain is whether core goods — less than a fifth of the CPI by weighting — will rise so much as to offset the underlying disinflation and cyclical weakness in many services categories. To be sure, May’s report did see some inflationary heat from major household appliances and tools. But those effects were swamped by the larger categories. One lesson here is that autos really dominate the core goods category, and the key will be whether
dealers have the audacity to raise prices a lot into a wobbly market.
Overall, tariffs have been more lousy for consumer demand than for inflation — still unfortunate, just a different kind of bad. Given that, it’s logical to expect that the Federal Reserve will get back to cautiously cutting policy rates in the months ahead to protect the employment side of its mandate. The inflation story hasn’t totally been written, but we’d have to see a dramatic jump in summer prices to change its trajectory. Also, it looks like we rode a very strong disinflation story into 2025 that continues to bear fruit. Trump can thank Fed Chair Jerome Powell for orchestrating that remarkable “soft landing,” and it’s a shame that the president is so intent on replacing him when his term is up next year.
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