As the Federal Reserve prepares for its meeting next week, fresh data shows that US inflation rose slightly in May, but remains under control—for now. The figures offer a temporary reprieve to markets but highlight growing tension between Donald Trump’s escalating tariffs and monetary policy.
Key Data at a Glance
• May CPI: 2.4% (vs. 2.5% expected, 2.3% in April)
• Core CPI: 2.8%, unchanged from April
• Fed Funds Rate: Expected to hold at 4.25–4.5%
• 2-Year Treasury Yield: Fell to below 3.95%
• S&P 500: Opened 0.1% higher
• Dollar Index: Down 0.3%
Despite Trump’s broad-based tariffs—10 percent on most imports and higher rates on Chinese goods—consumer price increases have remained modest so far.
“The boost to consumer prices from the tariffs remains microscopic for now,” said Samuel Tombs, chief US economist at Pantheon Macroeconomics. “Retailers typically take a few months to pass on higher costs.”
However, analysts warn that the full impact on inflation is still ahead.
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What’s Driving Inflation?
While the headline numbers appear contained, much of the softening came from sectors such as airfare, which are unrelated to tariff pressures.
“It’s an encouraging report,” said MIT’s Daniel Hornung. “But much of the improvement is in non-tariff-sensitive categories.”
Treasury Secretary Scott Bessent, testifying before Congress, credited the administration’s policies with easing price pressures after what he described as “four years of rising prices that hurt American families.”
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What’s Next for the Fed?
Markets widely expect the Fed to hold interest rates steady next week. However, with inflation likely to rise in the coming months as tariffs feed through to consumers, the outlook remains uncertain.
“If inflation stays tame or job market data weakens, a rate cut becomes likely,” said Alexandra Wilson-Elizondo of Goldman Sachs. “We expect the Fed to remain on hold next week, but a cut later this year is on the table.”
Trump has urged Fed Chair Jay Powell to follow the lead of other central banks and cut rates aggressively, calling for a full percentage point reduction and labeling Powell “a disaster.”
Vice President JD Vance also weighed in, calling the Fed’s “refusal” to cut rates “monetary malpractice.”
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Political Pressure and Economic Crossroads
Eswar Prasad of Cornell University said that while May’s inflation figure may ease some concerns, it will likely trigger further calls from the White House for action.
“This relatively benign figure will only intensify calls for rate cuts,” he said. “But the Fed faces a difficult balancing act between economic data and political pressure.”
The Fed’s preferred inflation measure—the Personal Consumption Expenditures (PCE) index—was 2.1 percent in April and is also expected to rise in the coming months.
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What to Watch
• Pass-through of tariffs to consumer prices over the next quarter
• Federal Reserve’s updated projections and tone at next week’s meeting
• Increased political pressure on monetary policy
• Market response to inflation and interest rate expectations
Trump’s trade war may not yet have fully hit American consumers—but the economic consequences are beginning to take shape. With inflation still smoldering and political pressure building, the Federal Reserve’s next moves will be closely watched.
