Wholesale and Consumer Prices Ease While Market Surges on Temporary U.S.–China Tariff Truce
Weekly Economic Review: May 16, 2025
Consumer and wholesale prices came in softer than expected, showing minimal impact from tariffs; retail sales growth slowed, reflecting the fading effects of pre-tariff stockpiling; housing starts saw a modest increase, though a drop in building permits suggests a weaker outlook ahead; the U.S.–China trade war deescalated with a 90-day truce, sparking a strong market rally; and Moody’s downgraded the U.S. credit rating.
This week began with April’s Consumer Price Index (CPI) coming in softer than expected. While food prices declined, energy prices rose. The headline Producer Price Index (PPI) posted an un-expected decline in April, marking the largest monthly drop in five years. Both the monthly and annual headline wholesale price figures were below market expectations and lower than March’s readings.
Retail sales slowed in April following a sharp surge in March, as consumers pulled back on purchases of motor vehicles, sporting goods, and other discretionary items. Notably, control group sales – which feed into GDP calculations – declined in April, signaling a soft start to the second quarter.
In April, housing starts saw a modest increase, largely driven by a rise in multifamily construction.
Building permits, a key indicator of future construction activity, declined for both single-family and multifamily units, suggesting a potential slowdown in new construction in the coming months.
Let’s review the CPI, the PPI, retail sales, and new residential construction in more detail.
CPI:The Bureau of Labor Statistics (BLS) released the consumer price data for April, showing that consumer prices rose by 0.2% month-over-month, following a 0.1% decline in March. This in-crease came in below market expectations of a 0.3% rise, and was largely driven by a 0.3% in-crease in shelter costs, which accounted for more than half of the overall gain. Other categories that saw price increases included household furnishings and operations, medical care, motor vehicle insurance, education, and personal care. In contrast, prices declined for airline fares, used cars and trucks, communication, and apparel. On a year-over-year basis, the CPI rose by 2.3% in April, down slightly from 2.4% in March and below the expected 2.4% increase.
The drop in prices for leisure-related categories—such as sporting events, airfares, and hotels—suggests that consumers may be pulling back on discretionary travel and entertainment spending. Goods prices, including new vehicles, remained flat, while service prices continued to climb. The stability in goods prices may indicate that businesses are either absorbing higher costs from re-cent tariffs or selling off inventory imported before the tariffs took effect. Since many businesses maintain several months’ worth of inventory, the impact of tariffs on goods prices is likely to be-come more evident in the coming months.
Food prices declined in April, with a 0.1% month-over-month drop following a 0.4% increase in March. Grocery store prices fell by 0.4% – the largest monthly decline since September 2020 – while prices for food away from home rose by 0.4%. Five of the six major grocery store food groups saw price decreases, with meat, poultry, fish, and eggs falling by 1.6%, driven largely by a 12.7% drop in egg prices. Prices for fruits, vegetables, cereals, and bakery products also declined. On an annual basis, food prices rose by 2.8%, with grocery store prices up 2.0% and food away from home increasing by 3.9%. Notably, prices for meat, poultry, fish, and eggs rose 7.0% year-over-year, with egg prices surging 49.3%.
Energy prices rose by 0.7% in April, rebounding from a 2.4% decline in March. This increase was primarily driven by a 3.7% rise in natural gas prices and a 0.8% uptick in electricity costs. However, on a year-over-year basis, energy prices declined by 3.7%, following a 3.3% drop in March, largely due to an 11.5% decrease in gasoline prices and a 9.6% decline in fuel oil.
Excluding food and energy, the core CPI rose by 0.2% in April, up from 0.1% in March but still be-low the expected 0.3% increase. The rise was driven by higher costs for shelter, household furnishings and operations, motor vehicle insurance, education, personal care, medical care, and lodging away from home. On an annual basis, the core CPI increased by 2.8%, unchanged from March and in line with market expectations. This marked the smallest annual increase since March 2021.
PPI:The BLS reported that the wholesale price index declined by 0.5% month-over-month in April, following a flat reading in March (revised up from a 0.4% decline). This drop contrasted with market expectations of a 0.2% increase and was primarily driven by a sharp decline in service prices. Goods prices remained unchanged, suggesting that businesses may be absorbing some of the in-creased costs associated with higher tariffs rather than passing them on to buyers. On an annual basis, the PPI rose by 2.4%, down from the 3.4% increase recorded in March and slightly below the expected 2.5% gain.
Service prices fell by 0.7% in April, reversing a 0.4% increase in March and marking the largest monthly decline since the index began in December 2009. The drop was largely attributed to a 1.6% decrease in trade service margins, particularly among wholesalers and retailers. Notably, over 40% of the decline stemmed from a 6.1% drop in machinery and vehicle wholesaling. Other significant declines were seen in portfolio management (-6.9%), food and alcohol wholesaling (-3.7%), airline passenger services (-1.5%), and traveler accommodation services (-3.1%).
Continued declines in food and energy prices contributed to flat goods prices overall in April after falling 0.9% in March. Within this category, food prices declined by 1.0%, following a 2.1% drop the previous month, while energy prices slipped 0.4%, marking the third consecutive monthly decline. Excluding food and energy, the core PPI fell by 0.4% in April, compared to a revised 0.4% increase in March (initially reported as a 0.1% decline). This was below the market forecast of a 0.3% rise. On a year-over-year basis, the core PPI increased by 3.1%, matching expectations but down from a revised 4.0% gain in March (initially reported as 3.3%).
The “super core” PPI – which excludes food, energy, and trade services and is considered a less volatile measure – declined by 0.1% in April. This followed a revised 0.2% increase in March (originally reported as 0.1%) and came in below the expected 0.3% rise. On an annual basis, the super core PPI rose by 2.9%, down from a revised 3.5% increase in March (initially reported as 3.4%).
Retail Sales:According to the U.S. Commerce Department, retail sales rose by 0.1% in April, following a revised 1.7% increase in March (up from the initially reported 1.4%), which is the strongest monthly gain since January 2023. The April figure slightly exceeded market expectations, which had anticipated no change. On a year-over-year basis, retail sales grew by 5.2% in April, matching the annual growth rate recorded in March.
Out of the 13 categories tracked by the Commerce Department, five posted gains in April. The largest increases were seen in food services and drinking places, which rose by 1.2% after a 3.0% gain in March. Building materials sales increased by 0.8%, following a 2.9% rise the previous month. Electronics and furniture each saw a 0.3% increase, with electronics coming off a 1.5% gain in March and furniture rebounding from a 0.1% decline. Online retailers also experienced a 0.5% uptick, improving from a 0.1% gain in March.
Conversely, several categories experienced notable declines. Sporting goods sales dropped by 2.5% after a strong 3.8% increase in March. Miscellaneous store sales fell by 2.1%, following a 1.4% gain. Department store sales declined by 1.4%, reversing a 0.4% increase in March. Gasoline station sales were down 0.5%, adding to a 2.5% decline the previous month, while clothing sales slipped 0.4% after rising 1.1% in March. This slowdown suggests that the early demand for goods like automobiles, mainly driven by concerns over impending tariffs, tapered off in April.
Excluding autos and gasoline, retail sales rose by 0.2% in April, following a revised 1.1% increase in March (up from 0.8%). This was slightly below market expectations of a 0.3% gain. Meanwhile, control group sales – which exclude food services, auto dealers, building materials, and gasoline stations and are used to calculate GDP – fell by 0.2% in April. This was below the market forecast of a 0.3% increase and down from a revised 0.5% gain in March.
New Residential Construction:: According to data from the U.S. Census Bureau and the Department of Housing and Urban Development, new home construction rose by 1.6% in April to an annualized rate of 1.36 million units. This increase fell short of market expectations, which had anticipated a 3.0% gain.
This gain was partially offset by a decline in single-family home starts, which fell to their lowest lev-el since July. Single-family starts, which typically make up the bulk of new home construction, declined by 2.1% to an annualized rate of 927,000 units. In contrast, multi-family housing starts rose by 11.1% to 420,000 units, surpassing the long-term average of 367,000 units recorded between 1959 and 2024.
Regionally, housing starts increased in the South and Northeast by 11.0% and 12.9%, respectively. However, the West and Midwest saw declines of 16.1% and 10.8%. In the West, single-family starts plunged 18.7% – the steepest decline since August 2023. On a year-over-year basis, total housing starts were down 1.7% in April. This included a 12.0% drop in single-family starts, while multi-family starts surged by 28.8%.
Building permits – a leading indicator of future construction – fell 4.7% in April to an annualized rate of 1.41 million units, the lowest level since May 2024. This was below both the revised March figure of 1.48 million and market expectations of a 1.45 million rate (a projected 1.2% decline). Notably, single-family permits fell to their lowest level since May 2023.
Regionally, the Northeast and West posted gains in building permits of 14.3% and 3.4%, respectively, while the Midwest and South saw declines of 8.1% and 9.6%. Permits for single-family homes dropped 5.1% to 922,000 units, and multi-family permits declined 3.7% to 490,000 units. On an annual basis, building permits were down 3.2% in April, marking the 15th consecutive month of year-over-year declines.
The continued weakness in single-family housing starts and permits highlights the challenges facing the housing sector. High mortgage rates, elevated home prices, and a 17-year high in new home supply are weighing on demand. Additionally, homebuilders anticipate rising construction costs due to tariffs, further reducing incentives to ramp up production. As a result, the outlook for homebuilding this year remains subdued.
In conclusion,markets experienced a strong rebound last Monday following the announcement of a temporary trade truce between the U.S. and China. Under the agreement, both countries committed to significantly reducing tariffs for a 90-day period in an effort to work toward a long-term trade resolution. The U.S. lowered its tariffs from 145% to 30%, while China reduced its tariffs from 125% to 10%. The truce took effect on May 14, 2025, and is set to remain in place until August 12, 2025, unless extended or revised through further negotiations.
Following the announcement of a 90-day truce, Treasury yields rose across all maturities. The two-year, five-year, and ten-year yields ended the week at 3.98%, 4.06%, and 4.43%, respectively—up by 1, 6, and 6 basis points from the previous week.
After markets closed on Friday, Moody’s announced it had downgraded the U.S. credit rating from Aaa to Aa1, shifting the outlook from negative to stable. The one-notch downgrade was driven by concerns over the growing national debt and persistent fiscal deficits. With this move, Moody’s be-comes the last of the three major credit rating agencies—following S&P in 2011 and Fitch in 2023—to lower the U.S. rating. The market expects this downgrade to put upward pressure on Treasury yields, particularly for mid- to long-term maturities, which could, in turn, lead to higher borrowing costs for consumers and businesses.
As with the previous week, the market continues to fully price in two 0.25% rate cuts in 2025, total-ing 0.50%. No rate cut is expected at the June FOMC meeting, and the probability of a 0.25% cut in July stands at just 35%, indicating a low likelihood of any action. The first anticipated rate cut is expected in September, with an 86% probability of a 0.25% reduction. Additionally, markets are fully pricing in another 0.25% cut in December, bringing the total expected cuts for the year to two.
markets experienced a strong rebound last Monday following the announcement of a temporary trade truce between the U.S. and China. Under the agreement, both countries committed to significantly reducing tariffs for a 90-day period in an effort to work toward a long-term trade resolution. The U.S. lowered its tariffs from 145% to 30%, while China reduced its tariffs from 125% to 10%. The truce took effect on May 14, 2025, and is set to remain in place until August 12, 2025, unless extended or revised through further negotiations.
Following the announcement of a 90-day truce, Treasury yields rose across all maturities. The two-year, five-year, and ten-year yields ended the week at 3.98%, 4.06%, and 4.43%, respectively—up by 1, 6, and 6 basis points from the previous week.
After markets closed on Friday, Moody’s announced it had downgraded the U.S. credit rating from Aaa to Aa1, shifting the outlook from negative to stable. The one-notch downgrade was driven by concerns over the growing national debt and persistent fiscal deficits. With this move, Moody’s be-comes the last of the three major credit rating agencies—following S&P in 2011 and Fitch in 2023—to lower the U.S. rating. The market expects this downgrade to put upward pressure on Treasury yields, particularly for mid- to long-term maturities, which could, in turn, lead to higher borrowing costs for consumers and businesses.
As with the previous week, the market continues to fully price in two 0.25% rate cuts in 2025, total-ing 0.50%. No rate cut is expected at the June FOMC meeting, and the probability of a 0.25% cut in July stands at just 35%, indicating a low likelihood of any action. The first anticipated rate cut is expected in September, with an 86% probability of a 0.25% reduction. Additionally, markets are fully pricing in another 0.25% cut in December, bringing the total expected cuts for the year to two.
Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California
Thomas McCullough
EVP of Commercial Bank of California
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