The May Consumer Price Index again showed inflation to be tame, with the overall inflation rate coming in at 0.1 percent and core CPI coming in at 0.2 percent for the month. The year-over-year rate for the two indexes were up 2.4 percent and 2.8 percent, respectively.

Through May we were not seeing much evidence of the tariffs in the CPI or other price indexes. However, the government is now raising considerably more revenue from tariffs. There is no evidence that exporters are absorbing the tariffs to any substantial extent by lowering their prices. Non-fuel import prices rose 0.3 percent in May and are up 1.7 over the last year.

If exporters are not absorbing the tariffs, then the cost will either be borne by a combination of importers and retailers or passed on to consumers in the form of higher prices. The experience of the pandemic indicates that retailers and wholesalers have considerable market power and will likely be well-positioned to pass on tariff costs. We should get some indication of the extent to which this will happen in the June data, although many companies stockpiled goods in advance of the tariffs, and may put off price increases as long as they can sell out of their pre-tariff imports.

Energy Prices Likely to Show a Modest Increase

Gas prices fell in each of the last four months, helping to keep the overall inflation rate below the core rate. This streak will end in June, with gas prices showing a modest increase for the month. Oil prices have mostly hovered near $70 a barrel for the last nine months. There is little reason to expect major changes in the near future. Many US producers will not be profitable if prices fall much from current levels, helping to put a floor on oil and therefore gas prices.

Food Prices Will Show Modest Increase

Food prices rose 0.3 percent in May, putting their increase over the last year at 2.2 percent. Big increases in the index for bakery products and cereals more than offset a sharp decline in egg prices. The June increase should be 0.2 percent, in line with the average over the last year. We may soon see the effect of the deportation efforts in the form of higher fruit and vegetable prices, but this will mostly not be seen in the June data.

 Rental Indexes to Come in at 0.2 Percent in June

Both rental indexes are continuing their long slowdown from peaks of more than 8.0 percent in early 2023. The rent proper index came in at 0.2 percent for May, while the owners’ equivalent rent index came in at 0.3 percent. This put their year over year increases at 3.8 percent and 4.2 percent, respectively.

The indexes measuring rents in units that change hands continue to show lower rates of rental inflation, or even modest deflation. The CPI rent indexes should continue to decline until they come closer to converging with these indexes.

Supply Chain Items Likely Showing Some Tariff Impact

The range of goods from appliances to furniture and car parts — whose prices soared in the pandemic — are the ones most likely to be affected by the tariffs. There was some evidence of the impact of tariffs in the May data. Appliance prices rose 0.8 percent, and the price of items in the category “other household equipment and furnishings” rose 1.0 percent. But apparel prices fell 0.4 percent and furniture prices fell 0.8 percent.

There should be less ambiguity in the June data with substantial tariffs already kicking in on most of these items. As noted earlier, retailers may be looking to defer price increases until they have sold off pre-tariff inventory, but most are probably at that point. With another round of tariffs likely hitting in August, there should be larger price increases in these goods over the rest of the year.

Medical Service Price Index Likely to Accelerate

The medical service index rose just 0.2 percent in May after rising 0.5 percent in each of the two prior months. The index was held down by anomalous price declines of 0.3 percent in the physicians’ services index and 0.2 percent in the dental services index. These are not likely to be repeated in June, and in fact will probably be reversed. The May decline put the year-over-year increase at 3.0 percent. The June rise is likely to be at least 0.3 percent.

Airfares Will Rise in June

Airfares fell 2.7 percent in June, the fourth consecutive sharp monthly decline. This drop reduced the monthly inflation rate by 0.023 percentage points. It is unlikely that this pattern of price declines will continue. Airfares are often erratic. It is likely that we will see at least some of the sharp price declines of the last four months reversed in June and subsequent months. Given its weight in the CPI — 0.88 percent overall and 1.1 percent in the core — airfares could be an important item pushing inflation higher in the months ahead.

Auto Insurance is a Wild Card

The index for motor vehicle insurance had been rising at double annual rates through 2023 and 2024, peaking at over 20 percent in the winter of 2024. Inflation in the index has been more tame lately, although highly erratic. It rose 0.6 percent in April and 0.7 percent in May but fell 0.8 percent in April.

Some of the cost pressures that had pushed insurance rates higher have lessened or even been reversed. The price of car parts and repairs are no longer rising rapidly, although tariffs may change that story in the months ahead. An increase in the accident rate following the pandemic seems to have at least leveled off. However, other factors, notably climate related damage, are still imposing rising costs.

The timing of price increases is uncertain, but we will likely continue to see rises, even if not as fast as last year. This matters for the CPI since its weight in the overall CPI is 2.8 percent and 3.5 percent in the core index.

Inflation Likely Still Tame in June, but Showing Some Evidence of Tariffs

The overall picture should still be one where inflation is moderate, but we will likely see the beginnings of the impact of recent tariff hikes. That will give us some indication of the future impact.