US inflation rises modestly in May, fueling political pressures on Fed

Inflation in the United States edged slightly higher in May, with the consumer price index (CPI) rising 2.4 percent on an annual basis, up from 2.3 percent in April, according to the data released by the Bureau of Labor Statistics on Wednesday.

The increase was just below economists' expectations of a 2.5 percent rise, based on a FactSet survey.

Core inflation, which strips out the often volatile categories of food and energy, climbed 2.8 percent over the past year -- also below the 2.9 percent projected.

Despite these softer-than-expected readings, inflation remains above the Federal Reserve's 2 percent target, underscoring ongoing challenges in fully stabilizing prices.

The inflation rate likely rose less than expected due to a sharp dip in gasoline prices. Lower energy prices were a "major source of disinflationary/deflationary pressure," noted Adam Crisafulli, an analyst with Vital Knowledge. Gasoline prices fell 12 percent from a year earlier, while clothing prices declined 0.9 percent, and airline fares dropped 7.3 percent. On the other hand, prices for beef, coffee, and housing continued to rise, offsetting the broader easing in other sectors.

In financial markets, the report prompted a modest lift in U.S. stock indexes during midday trading, while the U.S. Treasury yields and the U.S. dollar slipped, reflecting expectations that the Federal Reserve may be inching closer to cutting interest rates later this year.

Political pressure quickly mounted in response to the CPI data. U.S. President Donald Trump reiterated his call for the Fed to slash interest rates by a full percentage point, while U.S. Vice President JD Vance accused the central bank of engaging in "monetary malpractice" by maintaining current borrowing costs.

Although the inflation numbers do not yet reflect significant upward pressure from tariffs imposed by the Trump administration, economists warn the full effects could materialize in the second half of 2025.

"The impact of tariffs was smaller than expected in May. We expect to see it more clearly starting next month," said economists with Bank of America Global Research.

Combined with the solid May jobs report, the latest CPI data reduce the chances of a nasty bout of stagflation in the United States, according to Bank of America Global Research.

"Tariff impacts may begin appearing in the CPI data later this summer," said Seema Shah, chief global strategist at Principal Asset Management, noting the potential for inflation to creep above 3 percent by year-end if trade-related costs feed through the broader economy.

"Today's below forecast inflation print is reassuring -- but only to an extent," Shah added. "Tariff-driven price increases may not feed through to the CPI data for a few more months yet, so it is far too premature to assume that the price shock will not materialise."