Inflation ticked slightly higher in May amid Trump tariffs
Inflation ticked slightly higher in May amid Trump tariffs
The economy has defied warnings of tariff-induced price hikes.
The U.S. Consumer Price Index released on Wednesday showed May inflation ticking slightly higher, rising 2.4%, in line with expectations.
The report amounted to the latest test for President Donald Trump's tariffs as some retailers and economists warn the policy will raise prices.
So far, the economy has defied fears of price hikes, instead giving way to a cooldown of inflation over the months since Trump took office.
Economists expect inflation to have jumped slightly in May, registering year-over-year price increases of 2.4%. That would mark an increase from an inflation rate of 2.3% over the year ending in April, which amounted to the lowest inflation level since 2021.
The small increase in inflation anticipated by economists would keep price levels near the Federal Reserve's target rate of 2%, putting them well below a recent peak of 9% in 2022.
In recent weeks, Trump has dialed back some of his steepest tariffs, easing the costs imposed upon importers. Such companies typically pass along a share of the higher tax burden in the form of price hikes.
A trade agreement between the U.S. and China in May slashed tit-for-tat tariffs between the world's two largest economies and triggered a surge in the stock market. Within days, Wall Street firms softened their forecasts of a downturn.
The U.S.-China accord came weeks after the White House paused a large swath of Trump's "Liberation Day" tariffs targeting dozens of countries. Trump also eased sector-specific tariffs targeting autos and rolled back duties on some goods from Mexico and Canada.
Still, an across-the-board 10% tariff applies to nearly all imports, except for semiconductors, pharmaceuticals and some other items. Those tariffs stand in legal limbo, however, after a pair of federal court rulings late last month.
Tariffs remain in place for steel, aluminum and autos, as well as some goods from Canada and Mexico.
Warning signs point to the possibility of elevated prices over the coming months.
Nationwide retailers like Walmart and Best Buy have voiced alarm about the possibility they may raise prices as a result of the levies.
The Organization for Economic Co-operation and Development, or OECD, said this month it expects U.S. inflation to reach 4% by the end of 2025, which would mark a sharp increase from current levels.
Federal Chair Jerome Powell, in recent months, has warned about the possibility that tariffs may cause what economists call "stagflation," which is when inflation rises and the economy slows.
Stagflation could put the central bank in a difficult position. If the Fed were to raise interest rates, it could help ease inflation, but it may risk an economic downturn. If the Fed were to cut rates in an effort to spur economic growth, the move could unleash faster price increases.
For now, the Fed appears willing to take a wait-and-see approach. At its last meeting, in May, the Fed opted to hold interest rates steady for the second consecutive time.
"For now, it does seem like a fairly clear decision for us to wait and see," Powell said at a press conference in Washington, D.C., last month.
The Fed will announce its next rate decision on June 18. Investors peg the chances of a decision to leave rates unchanged at 99.9%, according to the CME FedWatch Tool, a measure of market sentiment.
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