EBC Markets Briefing | CPI Report May 2025: Inflation Slows, Markets Hold Back

​U.S. inflation softened in May, with key CPI data falling below expectations. The latest CPI Report May 2025 has prompted traders to increase bets on rate cuts, with the market now broadly expecting two reductions by the Federal Reserve before year-end.

The U.S. Department of Labor reported a 2.4% year-on-year rise in CPI, under the forecasted 2.5%. On a monthly basis, inflation ticked up just 0.1%, also below expectations. Core CPI, excluding food and energy, rose 2.8% from a year earlier and just 0.1% from April—both weaker than consensus.

CPI Report May 2025 Highlights Cooled Categories

The report showed clear disinflation across several components. Energy prices dropped 1%, while new and used vehicles saw declines of 0.3% and 0.5% respectively. Clothing prices fell 0.4%, offsetting a 0.3% rise in both food and shelter costs. The U.S. Bureau of Labor Statistics highlighted housing as the main driver behind the modest monthly increase.

According to CNBC, falling energy and service prices helped limit broader price gains. Some analysts had anticipated a rise in tariffs would impact categories like automobiles and apparel. However, both segments saw price declines, contradicting earlier predictions.

Rate Cut Bets Rise as Market Reacts to Softer CPI

Following the data release, market expectations for rate cuts intensified. Fed futures now imply 77 basis points of easing over the next 12 months, up from 67 previously. Projections for December rose to 48 basis points from an earlier 42. Financial markets reacted swiftly: U.S. equity futures turned higher and spot gold broke through the $3,360 level.

Tariff Pressures Yet to Hit Consumers

May marked the fourth consecutive month of lower-than-expected core inflation, raising questions over why tariffs have not translated into higher consumer prices. Analysts suggest that firms may still be absorbing extra costs, or that the temporary suspension of some tariffs has muted the impact so far.

Looking forward, that protection may wane. If the tariff pause expires and further duties are imposed, firms could be forced to pass on more costs to consumers, fuelling future inflation.

Fed Stance in Focus Amid Political Pressure

The Federal Reserve is expected to keep rates unchanged at its next meeting. Still, political pressure is mounting. President Trump has openly urged Fed Chair Jerome Powell to mirror rate cuts by the ECB and Bank of England, calling for a full percentage point cut.

Nick Timiraos, often seen as a reliable guide to Fed thinking, attributed the weaker CPI to lower prices in cars and clothing, sectors expected to reflect early tariff effects. The CPI Report May 2025 was released as the White House continues trade negotiations, adding further weight to upcoming Fed decisions.

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