Annual inflation in the U.S. edged up to 2.4% in May, following a 0.1% month-over-month increase, the Bureau of Labor Statistics reported. Both the headline and core readings were below consensus forecasts.
The uptick was driven mainly by increases in shelter costs (+0.3%), food at home and food away from home (+0.3%), and energy services (+0.4%). These gains were partially offset by a 1.0% drop in the energy index, due to sharply lower gasoline prices, and a 0.2% decline in transportation services.
Core inflation, which excludes volatile food and energy prices, rose just 0.1% in May, holding steady at an annual rate of 2.8% for the third consecutive month.
“The sluggish pace of CPI inflation in May suggests that weaker demand from consumers may be dominating the price war, at least at the moment, as consumers save up for a potential spike in inflation in the months ahead,” wrote BMO’s Scott Anderson.
Emerging tariff impacts make a summer rate cut unlikely
Economists are closely watching how tariffs are beginning to influence inflation, with further passthrough expected in the coming months.
TD Economics’ Thomas Feltmate says early signs of tariff-related price pressures are already emerging, with more expected as cost increases work their way through supply chains.
“On the surface, price pressures remained subdued in May. But looking under the hood, there’s already some evidence to suggest that tariff passthrough is underway,” he wrote. “We expect price pressures for consumer goods to heat up over the coming months, as businesses drawdown on existing inventory stockpiles and higher input costs start to squeeze profit margins.”
With tariff effects building, economists now expect Fed easing to come in the fall, with a summer cut increasingly unlikely.
Scotiabank’s Derek Holt says the report is unlikely to sway the Fed, which remains in wait-and-see mode pending more data and policy clarity.
“Does today’s CPI update matter to the Fed? Not in my opinion,” he wrote. “Read the memo. They want gobs of data on the dual mandate pressures and clearer signs of where the convoluted mess of other policies being pursued by the U.S. administration wind up before they figure out what may be the appropriate course of action.”
Though a rate cut isn’t coming in the upcoming weeks, this morning’s inflation data eased some pressure on Canadian bond yields—and in turn, fixed mortgage rates.
CIBC‘s Ali Jaffery echoed that view: “The softer pace of May inflation is good news for the Fed but it doesn’t change the calculus. They still need to wait and see how the economy and the job market respond, where tariffs settle and what fiscal policy looks like,” he wrote.
While a rate cut isn’t imminent, the softer U.S. inflation print eased pressure on bond markets, pushing the U.S. 10-year yield down to 4.45% while Canada’s 5-year eased roughly 1 basis point to 2.93%.
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Last modified: June 11, 2025
