Inflation at a Glance: May 2025

Overview:

The inflation picture in the United States remains complex and uneven. While headline CPI rose just 0.1% in May (+2.4% YoY), beneath the surface, cost pressures are building again—fueled by persistent services inflation, a rebound in import prices, and a surge in consumer and business inflation expectations. Markets had anticipated a cooling trend through mid-year, but recent data suggest the Federal Reserve’s fight against inflation is far from over.

Key Drivers:

• Tariffs Reignite Cost Pressures: The April tariff package—targeting a broad swath of Chinese imports—has begun to impact nonfuel import prices, which rose 0.5% MoM in April despite a 2.6% drop in fuel costs. Capital goods and consumer electronics have seen the sharpest increases. While headline inflation has not yet spiked, the tariff effect is likely to appear with a lag, particularly in durable goods and downstream sectors like retail and manufacturing.

• Services Remain Sticky: Core services—including healthcare, insurance, and housing—continue to exhibit structurally high inflation, driven by wage rigidity and elevated input costs. This is where the Fed’s policy tools are least effective and where inflation has proved most persistent.

• Sentiment and Expectations Shift: The University of Michigan’s preliminary May report showed 1-year inflation expectations jumping to 7.3%, the highest in decades, before retreating slightly in the final reading to 6.6%. Meanwhile, Philadelphia Fed data indicate firms plan to raise their own prices by 3.8% over the next 12 months—up sharply from earlier expectations. This forward-looking inflation is arguably more dangerous than lagging CPI—it shapes wage negotiations, pricing power, and monetary policy reactions.

Policy Outlook:

The Fed held rates steady at 4.25–4.5% in May but struck a decidedly hawkish tone. With unemployment edging up slightly and inflation showing renewed resilience, the central bank is signaling a longer “higher for longer” stance. The prospect of rate cuts in Q3 has now largely evaporated from market pricing, replaced with expectations for a prolonged restrictive stance through year-end.

Implications for Businesses and Investors:

Mid-market companies should brace for continued input cost volatility, especially in imported goods, services, and labor-heavy operations. Strategic moves like renegotiating supply contracts, reducing reliance on imports, and automating low-value processes will be essential. For investors, inflation-linked assets may regain favor, while rate-sensitive sectors (e.g., real estate, consumer durables) face renewed headwinds.