Trump's Inflation Honeymoon May Be Over

After months of cooling U.S. inflation easing investor concerns, the trend could reverse when the May report drops Wednesday, as rising tariff-driven costs threaten to push consumer prices higher.

The annual rate of gains in the Consumer Price Index has been on a steady retreat this year, falling from 3% in January to 2.3% in April — the lowest reading in over four years. The trend has so far been fortuitous for President Donald Trump, who has repeatedly cited falling inflation to push for lower interest rates.

Yet, economists now expect that beautiful streak to break.

May Inflation Report: What Do Economists Expect?

The median forecast sees headline inflation ticking up from 2.3% to 2.5% in May, while core CPI, which strips out food and energy, is expected to rise from 2.8% to 2.9% year-over-year. Month-over-month, CPI is projected to remain steady at 0.2%, with core inflation accelerating to 0.3%, marking the fastest monthly gain since January.

This uptick comes on the heels of Trump's tariff rollercoaster. On April 2, what he dubbed as ‘Liberation Day,’ he announced sweeping duties on all trade partners, later dialing them back to a 10% universal tariff with a 90-day negotiation period.

China, however, saw tariffs spike as high as 145% before both sides agreed to slash them by 115 percentage points, pending ongoing negotiations.

These abrupt policy shifts are now making their way through the supply chain. In recent business surveys, both the services and manufacturing sectors reported steep input cost increases in April and May — reminiscent of pandemic-era bottlenecks.

Experts Warn Of Tariff Effects

Bank of America economist Stephen Juneau said May's data should reflect a wider range of tariff effects compared to April, when the clearest sign was an 8.8% surge in audio equipment prices.

Yet, he expects that “favorable seasonal factors for autos and declines in certain services categories will keep a lid on the top line inflation numbers.”

Goldman Sachs economist Jessica Rindels sees tariffs providing "a somewhat larger boost" to monthly inflation than markets expect, but not just yet.

Goldman forecasts core CPI inflation to average 0.35% monthly in the coming months, citing a “sharp acceleration in most core goods categories” but a still-muted impact on services inflation.

Looking ahead, Goldman sees core CPI reaching 3.5% year-over-year by December, with core PCE — the Federal Reserve’s preferred metric — climbing to 3.6%.

Barclays Private Bank strategist Julien Lafargue said, "This CPI report could show the first signs of a tariff-induced pickup in inflation. The good news though is that lower energy prices should keep the headline figures in check."

Lafargue added the report is unlikely to shift the Federal Reserve's strategy significantly, as investors remain focused on the timing — not the likelihood — of rate cuts, expected in either September or October.

Could Trade Progress Ease Inflation Fears?

Wall Street is not too far from retesting record highs. As of Tuesday, the S&P 500 – tracked by the Vanguard S&P 500 ETF VOO – traded at 6,025 points, less than two percentage points below its February’s all-time highs.

While a rising inflation outcome – or even worse an upside surprise – could dent risk sentiment and cast doubt on the current outlook for two Fed rate cuts in 2025, there’s a potential silver lining.

High-level US-China trade talks are underway in London this week, with negotiators reportedly working toward further tariff rollbacks and business-friendly measures.

The outcome of these talks could be critical. A breakthrough would not only ease inflationary pressure from tariffs but also restore some confidence in global trade flows, which have been a source of volatility in recent months.

Investors will be closely watching both Wednesday's CPI release and developments in London, with both carrying significant weight for the trajectory of the U.S. economy and markets in the second half of 2025.

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