The first CPI report under tariff shocks: Wall Street expects May core inflation to see the largest month-on-month increase in a year

According to Zhitong Finance APP, the Consumer Price Index (CPI) for May is expected to show a slight acceleration in price increases compared to April. As the inflation report is set to be released on Wednesday, investors are closely monitoring signs of whether President Trump's tariffs are affecting consumer payments.

Bloomberg data indicates that the overall inflation rate for May is expected to rise slightly from 2.3% in April to 2.4%, the latter being the lowest annualized increase since February 2021. Month-on-month prices are expected to rise by 0.2%, unchanged from April's increase. Excluding the volatile costs of food and energy, the core CPI for May is expected to rise by 2.9% year-on-year, slightly higher than April's 2.8%; the month-on-month increase in core CPI is expected to be 0.3%, up from 0.2% in April.

The period reflected in the report comes about a month after Trump's "Liberation Day" tariff declaration impacted the market and businesses. Although several retaliatory tariffs have been suspended, the 10% base tariff on most countries remains in effect.

Mexico and Canada still face tariffs related to fentanyl, and special tariffs on industries such as steel, aluminum, and automobiles remain unchanged. Tariffs on Chinese goods remain high, with the effective tax rate hovering around 30%.

"The May CPI report will serve as an important test of the speed and extent to which tariff increases are passed on to consumers," noted a team led by Wells Fargo economist Sarah House in a preview of the report.

She expects that rising commodity prices will drive a moderate increase in overall and core inflation, but this data will not show a significant jump. However, the bank's economists believe that there are still price upside risks later this year, a view shared by most institutions on Wall Street.

Goldman Sachs' Jan Hatzius pointed out: "Future tariffs may provide a greater push to monthly inflation, and we expect the month-on-month increase in core CPI to be around 0.35% in the coming months." He observed that most core commodity categories are experiencing "sharp acceleration," but the impact on core services inflation is limited at least in the short term.

BNP Paribas stated that although the core inflation for May may record the largest monthly increase since the second quarter of 2023, stronger data is expected in June and July. The bank believes that price increases triggered by tariffs typically manifest with a lag of two to three months, but the uncertainty regarding the timing and impact of related policies casts a shadow over the outlook.

"The Trump administration's 'yo-yo' tariff implementation strategy, combined with the uncertainty of policy timing, form, and duration, may prompt businesses to adopt strategic patience on pricing issues," wrote Andy Schneider, a senior U.S. economist at BNP Paribas, in a client report last week. "This could not only lead to a more chaotic and prolonged market response but also delay inflation triggered by tariffsAtlanta Federal Reserve President Bostic recently expressed similar concerns, stating that the frequent changes in tariff policy "make it harder for us to assert that the price increases caused by tariffs are just a one-time event."

The market generally expects the Federal Reserve to maintain interest rates at the upcoming policy meeting next week