U.S. May CPI Preview: Last Key Piece to Rate Cut Decision

While the Labor Department was forced to limit CPI data collection for the foreseeable future due to staffing shortages, the U.S. Bureau of Labor Statistics is scheduled to release the CPI data for May 2025 on the 11th of June at 8:30 a.m. ET. Market consensus is generally predicting an increase from April's 2.3% to 2.5%, core CPI is anticipated to increase from 2.8% to 2.9%.

The U.S. stock market has demonstrated notable resilience in recent months, with the S&P 500 Index recovering back to the 6,000-point mark in early June, recovering from all the losses suffered since the announcement of Trump's tariff policies. This rally has been supported by easing tariff concerns, strong corporate earnings reports and generally resilient economic data. However, investors remain cautious, particularly ahead of the June FOMC's meeting - just one week after the CPI release - when the committee will unveil its updated dot plot, which may signal the future pace and timing of rate cuts. Against this backdrop, the May CPI could heavily influence that outlook.

Housing Costs: The Persistent Anchor of CPI
Housing costs remains the key-driver of overall inflation in this cycle as it accounts for more than a third of the CPI. In April, the shelter index rose by 0.3% month-on-month with the OER component up by 0.4% and rent of primary residence similarly around 0.4%. While they are still positive, its monthly gains are down from 0.6% ~ 0.7% at the peak of 2024. More notably, private-sector rent leading indicators (from sources such as Zillow, ApartmentList, etc.) turned flat or even negative in late 2023, signalling relief ahead.Morgan Stanleyresearchers point out that such indicies historically lead the CPI shelter component by around 12 months, and this trend suggests that "headline shelter inflation should continue lower in 2025".

Food Inflation: Volatility Easing as Supply Shocks Abate
In April, the CPI egg index plunged 12.7% in the span of a month - part of the largest monthly grocery prices since 2020. Even after that drop, egg prices remained nearly 50% than a year ago, but the direction is finally down. This helped pull that overall grocery index down by -0.4% in April. In contrast, there was a strong +0.4% grocery price rise in March, so April's decline was a welcome relief to the market. The consensus view for May is that food at home will be roughly flat to slightly up in May, staying well below the sharp increases of last year. USDA's(U.S. Department of Agriculture) latest outlook forecasts full-year 2025 grocery price inflation of only 2.1%, which is below the 20-year average, suggesting that food prices are on track to normalize.However, risks remain.J.P. Morgannotes that “the monthly trends don’t point to any real downshift yet,” and signs of building goods inflation pressures could weigh on consumer spending.Wells Fargoemphasizes that while April’s food price drop was notable, “policy uncertainty and general wariness to increase prices will likely weigh on margins,” suggesting inflation may remain sticky.WalmartCEO's also warns that “food inflation is primarily driven by eggs and dairy, but it’s not just those categories,” and while some commodity prices may stabilize, “processed food prices may not decrease at all in 2025.”In sum, food inflation is easing but not gone, with extreme swings fading and consumers seeing some relief. The “food fight” on inflation may be turning into a truce, but a downside surprise in food prices would reinforce this narrative and help soften headline CPI, while an upside surprise remains possible if supply disruptions occur.

Energy Prices: Fuel Remains a Wildcard but Lately Tame
In April, there was a slight rebound in energy as the overall energy index rose +0.7% as a spike in natural gas and electricity price outweighted a continue slight decline in gasoline. In May, early indications suggest gasoline prices were relatively stable through May, and other energy components may ease. Gasoline prices dipped back to price levels similar to the end of April. Energy no longer looks like an inflation accelerant in the near term consistent withJP Morgan's view on energy prices. Unless there is a sudden oil price spike or refinery issue, fuel costs are providing a tailwind to disinflation. For May's CPI, a downside surprise would drag inflation lower, an upside surprise seems less probably unless there was a nunforeseen jump in gas prices during the sample period.

Trade Tariffs and Import Prices
The 2025 tariffs cover essentially all consumer goods from China, implemented in Q1 under the new trade policy,they amount to an additional 10-20% imporat tax on a wide range of products. Early evidence is visible: March and April CPI reports hinted at rising prices in tariff-sensitive goods(e.g., apparel prices in March had their strongest jump in years).Goldman Sachsnoted that the categories most exposed to the new tariffs could add a 0.06% to core CPI each month. However there is uncertainty: firms might absorb the costs, consumers look for substitutes or a trade deal could roll the tariffs back.Well Fargoechos that the May CPI report is "an important test of the speed and magnitude to which higher tariff rates are being passed along to the consumer,” but caution that it remains unclear if recent price moves are due to tariffs or normal volatility. The Fed has explicitly voiced their concern that above-target inflation could be worse off due to tariffs, but Chair Powell recently emphasized that the effects may take time to materialize and that price stability remains the Fed's top priority.For now, investors should be aware that tariffs act as a supply shock. The Fed has explicitly cited concern that above-target inflation could "worsen due to tariffs", which is one reason why they are not eager to cut rates prematurely. If geopolitical developments lead to an easing of trade tensions, that would be a signal for inflation improvement.

The May CPI report follows a mixed NFP print: 139,000 jobs added (vs. 126,000 expected; 147,000 prior) with the unemployment rate steady at 4.2%. While job creation remains positive, the trend reflects the robustness of the current labor market - dampening the hopes for a rate cut in summer.If CPI prints near consensus (2.4% headline and 2.8% core), the Fed is likely to maintain its current stance in June, keeping September as the earliest window for rate cuts. A hotter-than-expected core reading could delay easing, especially under the shadow of tariff price pressures. Conversely, a softer CPI would reinforce dovish momentum and lift the probability of a July cut.As of 9th of June, CME FedWatch shows 54.1% of a September cut, and 14.5% of a July cut.

The CPI outcome will clarify whether the Fed leans into easing or stays sidelined amid inflation concerns.

Focus would be on the Fed's reaction once the CPI data hits the market. The timing is of utmost critical as the Fed's policy meeting is only a week after the CPI release. As noted, theFed has signaled a bias to hold rates steady as of now, but this stance is explicitly "data-dependent". A CPI report in line with or below expectations would reinforce the Fed's decision to hold, and could even tip more officials toward considering rate cuts later in the year.