• Treasury yields are lower following a cooler than expected May CPI report. The release defied predictions that tariff-related costs would start to be seen, but if those costs were in play, it was pretty hard to spot them. Meanwhile, the US and China have agreed to a framework to hammer out a trade deal. The heavy betting is that once all the horse-trading theater is done, the US will get its rare earth minerals while China gets its high-tech chips. Currently, the 10yr is yielding 4.44%, down 3bps on the day, while the 2yr is yielding 3.96%, down 5bps on the day.

 

  • The first of the May inflation reports is out this morning in the form of CPI. Overall inflation rose 0.1% (0.08% unrounded, so call it a down-the-middle 0.1%) for the month. That’s cooler than last month’s 0.2% which was also the expectation. Still, the YoY rate ticked up from 2.3%(2.31%) to 2.4% (2.35%) as an unchanged reading from last year rolled off. In fact, another 0.0% reading from June 2024 will roll off next month which will further stymie hopes for the YoY rate to move towards the 2.0% target. Between now and the September FOMC meeting, where market odds are the strongest for the first rate cut in 2025, the largest MoM figures rolling off are a pair of 0.2% prints. Thus, don’t expect the YoY rate to be anywhere close to 2.0% by September.

 

  • Meanwhile, core CPI also increased 0.1% MoM (0.13% unrounded, so call it a “high” 0.1%) vs. 0.2% the prior month (and better than the 0.3% expectation). That kept the YoY rate at 2.8% (2.79% from 2.78%) and better than the 2.9% expected. Scanning the 2024 core prints that will roll off between now and September, it’s a slightly better picture than the overall with a pair of 0.2% prints leaving followed by a pair at 0.3%. So, perhaps some improvement in the YoY can be had by September if the 2025 levels are 0.2% or lower but given the potential for higher tariff costs to leak into subsequent numbers the improvement is likely to be halting at best. The Fed’s March forecast saw little improvement in inflation (measured by PCE) for this year on a YoY basis so that may not be a bad forecast, although they will update it at next week’s FOMC meeting.

 

  • The services category rose 0.2% for the month vs. 0.3% in April, while the always influential Owner’s Equivalent Rent (OER) rose 0.3% vs. 0.4% in April. At 26% of the CPI basket, OER is the single largest component so how it goes is always influential and the one-tenth drop during the month certainly contributed to the cooler headline print (see graphs below). While it continues to moderate after lagging for much of 2024 it still is above the pre-pandemic 0.2% – 0.3% monthly range.

 

  • Declines in car and apparel prices – two categories expected to lead on tariff cost increases – also contributed to a cooler core CPI reading and represents frustration for those looking for tariff costs to start creeping into the numbers. Front-running of purchases and building inventories can explain some of the delay but are foreign exporters eating some of it and/or importers stateside? Or is it still too early to see the impact?

 

  • So, would the Fed balk at a September rate cut if inflation is still sitting near 2.5% – 3.0% YoY? Well, first it would depend on what the monthly prints are doing. Anything at or north of 0.3% will indeed give them reason to pause if that’s what they want to do. But even that is not so clear. If the 0.3% is more from the goods side – highlighting the tariff impact – but the services side is more benign, then a rate cut remains possible. This goes back to the consensus Fed view that tariff costs are one-off items (transitory, if you will), while the previously “sticky” services side has shown softer prints of late which was the focus of the Fed’s inflation concern heading into 2025.

 

  • Tomorrow, we get a look at wholesale pricing pressure with May PPI. We mentioned on Monday that part of the big drop in retail-level inflation (read: CPI) in 2022 and 2023 was deflation in wholesale prices that was partially passed on in lower retail prices. Wholesale prices are no longer falling and, in fact, have been erratically climbing for several months. The tariff impact is bound to find its way into these numbers as well, particularly steel and aluminum which are intermediate level inputs in much of PPI world. That will also work to keep CPI from falling to that 2% Fed target.

 

  • Also tomorrow is Initial Jobless Claims on and the preliminary look at the latest University of Michigan Sentiment Survey. Jobless claims saw the largest claims last week since October with continuing claims maintaining its recent climb to 1.9 million. Will the trend in both series continue higher, indicating a real-time look at slowing labor momentum?

 

  • The University of Michigan series has been dogged by some extreme inflation forecasts which have rendered the report somewhat questionable in that regard. Especially as the New York Fed’s latest consumer survey showed much more benign levels of inflation expectations. The 1yr outlook fell 0.43% to 3.2%, which is the first decline since the election and the 3yr and 5yr inflation expectations also fell. This report uses a different methodology where more than 1,000 households are tracked for a year before being replaced by another, so it has more continuity of opinion, and perhaps participants more engaged long-term than the web-based Univ. of Michigan constituents. Expect to hear the Fed leaning towards this survey vs. the U. of Michigan version, at least for this y

May CPI – Cooler Than Expected

Source: Bloomberg 

Car and Apparel Surprised with Price Declines Despite Fears of Tariff Costs Leaking into Prices

 

Owner’s Equivalent Rent – Largest Component of CPI – Continues to Dip in 2025

Published: 06/11/25 Author: Thomas R. Fitzgerald