May Inflation Eases as Tariff Impact Remains Limited: Markets Eye Fed Cuts

Weekly Economic Review: June 13, 2025

Softer consumer and wholesale inflation data and minimal tariff impact thus far raise odds of a Fed rate cut

Key Summary:

The week began with May’s Consumer Price Index (CPI) coming in softer than expected, suggest-ing that businesses are either absorbing higher costs or continuing to sell pre-tariff inventory ac-cumulated before the implementation of the new tariffs. However, markets still anticipate that businesses may begin raising prices in the coming months.

While food prices increased, energy prices declined for the second consecutive month, driven by a continued drop in gasoline prices. Grocery prices rebounded after falling in April, although prices for meat, poultry, fish, and eggs declined.

Goods prices excluding food and energy were flat in May, despite notable declines in new and used vehicles as well as apparel. Meanwhile, services prices excluding energy rose month-over-month, though at a slightly slower pace than in April. Weaknesses in categories such as airline fares, sporting events, and lodging suggest a potential pullback in discretionary spending.

The headline Producer Price Index (PPI) posted a slight month-over-month increase in May, following two consecutive months of decline, and came in below market expectations. This uptick was driven by lower service prices, indicating that tariffs have yet to translate into higher costs for businesses.

Service prices edged up in May from their April levels, reversing the sharpest monthly decline since December 2009. The increase was largely due to rising margins among wholesalers and retailers – particularly in vehicle and machinery wholesaling – after a drop the previous month. This points to ongoing uncertainty about the effects of trade policy on prices and demand.

Goods prices also rose in May, building on a modest gain in April. The May increase accounted for over 80% of the rise in core goods prices (excluding food and energy). Food prices rebounded after two months of decline, while energy prices remained flat.

Let’s review the CPI and the PPI in more detail.

CPI:

The Bureau of Labor Statistics (BLS) released consumer price data for May, showing that prices rose 0.1% month-over-month, following a 0.2% increase in April. This figure came in below market expectations of a 0.2% rise and was largely driven by a 0.3% increase in shelter costs. On a year-over-year basis, the CPI rose 2.4% in May, slightly up from 2.3% in April and in line with expectations.

Food prices increased in May, rising 0.3% month-over-month after a 0.1% decline in April. Grocery store prices rose 0.3%, while prices for food away from home also climbed 0.3%. Three of the six major grocery store food groups saw price increases, with cereals and bakery products up 1.1% and fruits and vegetables up 0.3%. In contrast, prices for meat, poultry, fish, and eggs fell 0.4%, driven primarily by a 2.7% drop in egg prices. On an annual basis, food prices rose 2.9%, with grocery store prices up 2.2% and food away from home increasing 3.8%. Notably, prices for meat, poultry, fish, and eggs surged 6.1% year-over-year, with egg prices soaring 41.5%, but most of those increases occurred in earlier periods.

Energy prices declined 1.0% in May, following a 0.7% increase in April. This drop was mainly due to a 2.6% decrease in gasoline prices. Year-over-year, energy prices fell 3.5%, compared to a 3.7% decline in April, largely reflecting a 12.0% drop in gasoline prices and an 8.6% decrease in fuel oil.

Other categories that experienced price increases included medical care, motor vehicle insurance, household furnishings and operations, personal care, and education. Meanwhile, prices declined for airline fares, used cars and trucks, new vehicles, and apparel.

Excluding food and energy, the core CPI rose 0.1% in May, down from 0.2% in April and below the expected 0.3% increase. On an annual basis, core CPI rose 2.8% for the third consecutive month, slightly below the market forecast of 2.9%.

PPI:

The BLS reported that the Producer Price Index (PPI) rose 0.1% month-over-month in May, follow-ing a revised 0.2% decline in April (originally reported as a 0.5% drop). The May figure came in be-low the market expectation of a 0.2% increase, largely due to lower service prices. On an annual basis, the PPI rose 2.6% in May, up slightly from April’s revised 2.5% (initially 2.4%) and in line with expectations.

Service prices increased 0.1% in May, reversing a 0.4% decline in April – the largest monthly drop since the index’s inception in December 2009. The rebound was primarily driven by a 0.4% rise in trade service margins, particularly among wholesalers and retailers. This gain was partially offset by a 0.2% decline in transportation and warehousing services. Notable increases were seen in machinery and vehicle wholesaling, traveler accommodation services, apparel and accessories retailing, and alcohol retailing. Margins for machinery and vehicle wholesaling rose 2.9% in May, following a 0.9% decline in April. Meanwhile, declines were observed in airline passenger services, furniture retailing, securities brokerage, investment advisory services, and portfolio management. Airline passenger service prices fell 1.1%, marking the third consecutive monthly decline.

Goods prices rose 0.2% in May, following a 0.1% increase in April. Over 80% of the May gain came from core goods (excluding food and energy), which also rose 0.2%. Food prices edged up 0.1% after falling 0.9% in April and 2.1% in March. Energy prices were unchanged in May, following a 0.1% increase in April. Price increases were recorded for tobacco products, gasoline, processed poultry, roasted coffee, residential natural gas, and oilseeds. Notably, tobacco product prices rose 0.9%.

Excluding food and energy, the core PPI rose 0.1% month-over-month in May, compared to a revised 0.2% decline in April (initially -0.4%). This was below the market forecast of a 0.3% increase. On a year-over-year basis, the core PPI rose 3.0% in May, slightly below expectations of 3.1% and down from a revised 3.2% in April (initially 3.1%).

The “super core” PPI – which excludes food, energy, and trade services and is considered a less volatile measure – rose 0.1% month-over-month in May, below the expected 0.3% increase and following a 0.1% decline in April. On an annual basis, the super core PPI rose 2.7% in May, down from 2.9% in April.

Conclusion:

The market anticipates that the Federal Reserve will hold interest rates steady at its upcoming June 17–18 FOMC meeting. While the Fed welcomes the recent benign consumer and wholesale inflation data, this alone is not sufficient to justify a rate cut – especially given the continued resilience of the labor market and strong wage growth, despite some emerging signs of weakness. Additionally, the Fed is expected to closely monitor the progress of trade negotiations and their potential impact on the broader economy.

Treasury yields edged lower this week, with the two-year, five-year, and ten-year yields closing at 3.96%, 4.02%, and 4.41%, respectively—down 8, 11, and 10 basis points from the previous week. Regarding rate cut expectations, the market is fully pricing in two 0.25% cuts in 2025, totaling 0.50%. The first 0.25% cut is anticipated either at the September FOMC meeting, with an 86% probability, or at the October meeting, where the probability rises to 100%. Additionally, the market expects another 0.25% cut in December, also with a 100% probability.

Next Week’s Economic Calendar:

Markets will be closely monitoring several key economic indicators this week for insights into the economy’s direction. On Tuesday, updated retail sales data will offer a snapshot of consumer activity. Headline retail sales are expected to decline by 0.7% in May, following a modest 0.1% in-crease in April. However, when excluding more volatile components, control group sales—which better reflect underlying consumer trends—are projected to rise by 0.3%.

The main event of the week is Wednesday’s FOMC meeting. After holding interest rates steady at its January, March, and May meetings, the Federal Reserve is widely expected to maintain the current target range of 4.25%–4.50% as it continues to evaluate the effects of fiscal policy on the broader economy. The Fed will also release its updated Summary of Economic Projections (SEP), offering fresh forecasts on economic growth, inflation, and interest rates.

Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

Thomas McCullough
EVP of Commercial Bank of California

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