US Inflation Rises Less Than Expected to 2.4 Per Cent in May
The US inflation rate rose to 2.4 per cent in May, according to the latest figures released by the Bureau of Labor Statistics. The annual consumer price index figure was below the 2.5 per cent predicted by analysts surveyed by Bloomberg, but above the 2.3 per cent recorded in April. This relatively modest increase has sparked debate among economists about the impact of Donald Trump’s tariffs on consumer prices.
The core measure, which strips out changes in food and energy prices, remained flat at 2.8 per cent, against expectations of a slight rise. Samuel Tombs, chief US economist at Pantheon Macroeconomics, noted that “the boost to consumer prices from the tariffs remains microscopic for now, though that’s entirely in keeping with past evidence showing that retailers usually take at least three months to pass on cost increases to consumers.” This observation suggests that the effects of Trump’s tariffs on consumer prices have been limited so far.
However, not all economists are convinced that this trend will continue. Daniel Hornung, senior fellow at MIT and a deputy director of the National Economic Council under former US president Joe Biden, cautioned that “it’s an encouraging report, but when you dig in a little bit a lot of what was encouraging about it was in categories, such as airfares, which are really not related to tariffs.” This observation highlights the complexity of the issue and the need for careful analysis.
Inflation is expected to increase further in the coming months as the impact of Trump’s tariffs, which were unveiled in April, is passed on to consumers and businesses in the world’s largest economy. The US currently applies a 10 per cent fee to most imports, as well as much higher levies on goods from China. These tariffs are likely to put upward pressure on prices, particularly in sectors that rely heavily on imported goods.
The financial markets reacted to the news, with the US two-year Treasury yield dropping almost 0.1 percentage point following the report to below 3.95 per cent. Stocks opened higher, with the S&P 500 up 0.2 per cent shortly after Wall Street’s opening bell, while the dollar index was down 0.3 per cent. The US Federal Reserve is expected to hold borrowing costs at between 4.25 per cent and 4.5 per cent when it meets next week, in anticipation of further rises in inflation.
According to Alexandra Wilson-Elizondo, global co-chief investment officer of Multi-Asset Solutions at Goldman Sachs Asset Management, “if inflation stays under control or the job market weakens, the Federal Reserve will likely consider cutting interest rates down the road.” She added that “we expect the Fed to remain on hold at next week’s meeting, but we see a path to a rate cut later in the year.” This view is consistent with market expectations, which are currently pricing in two Fed rate cuts by the end of the year, with the first arriving in September or October.
The issue of inflation has become a contentious one in the US, with Trump heaping pressure on Fed chair Jay Powell to follow the lead of the European Central Bank and the Bank of England and cut borrowing costs this year. Trump has called for a full percentage point cut and labelled Powell “a disaster”. Eswar Prasad, professor at Cornell University, noted that he expected the “relatively benign” figure to trigger more calls from the White House for cuts, with economic and political pressures set to become “increasingly difficult to balance in the months ahead”.
The Fed’s preferred inflation measure, the personal consumption expenditures index, fell to 2.1 per cent in April, but is also expected to rise in the months ahead. As the US economy continues to navigate the challenges posed by Trump’s tariffs and the global economic landscape, the issue of inflation is likely to remain a key concern for policymakers and market participants alike.
The data was sourced from the Bureau of Labor Statistics and was reported by the Financial Times. The Financial Times also provided analysis and insights from various economists and market experts.
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