US May CPI Slows... US Companies Absorbing Tariff Costs

"Companies have ample pre-tariff inventory + reluctant to raise prices"

Stabilization of super-core services prices contributes to easing inflation

"Trump's pressure on the Fed for rate cuts will intensify"

Contrary to economists’ expectations, the US consumer price index (CPI) rose just 0.1% in May (local time, the 11th), indicating that the impact of tariffs has not yet been reflected in US inflation.

US economists had predicted that, starting in May, some companies would partially pass on the costs of imported products, resulting in May’s headline CPI rising 0.2%p to an annual 2.4%, with core CPI up 0.3% pointing to an annual 2.9%.

However, on this day, the US Department of Labor announced a 0.1%p increase for both headline and core CPI, with headline CPI at 2.4% and core CPI at 2.8%.

Falling service prices contributed to moderating inflation. According to Bloomberg, the 'super-core service sector index,' which excludes housing costs, rose just 0.06%. When inflation peaked in 2022, this index posted a monthly rise between 0.31% and 0.96%.

A sharp drop in energy prices during May also contributed to price stability. Gasoline costs plunged 2.6% in one month and fell as much as 12% year-over-year. The price of public gas utility services, which had been climbing since late last year, suddenly dropped 1% in May. Prices for used cars and trucks also declined, and some services, such as airline fares, dropped due to weakened consumer sentiment and reduced government demand, leading to a general decline in overall prices.

Nevertheless, economists cautioned it is still too soon to be reassured.

Ali Jeffrey, an economist at CIBC Capital Markets, noted, "Companies may have managed the early stages of the trade war by absorbing tariffs," adding it is premature to declare safety. He stated, "If tariff hikes persist, core inflation will rise 1%p over time, and GDP is expected to fall 0.5%p further."

Jochen Stanzl, Chief Market Analyst at CMC Markets, also said, "It takes time for tariff-induced inflation to filter through," and that investors may be able to shake off recession concerns for now, which would be positive news for equity bulls.

Several variables are at play.

A significant portion of the country-by-country reciprocal tariffs announced by Trump in early April has been put on hold. With the possibility of future tariff reductions, companies apparently have not yet begun raising product prices.

In the first quarter, when the US posted a record-high goods trade deficit, American companies rushed to ship inventory ahead of Trump’s tariffs, securing ample stock. In Apple’s case, iPhones were even urgently airlifted from a factory in India.

Given consumers have become increasingly sensitive to price increases in recent years, companies appear to be postponing passing on tariff costs as long as possible.

There is also the effect of the Trump administration pressuring companies over price hikes. In May, when Walmart, the largest offline retailer, stated during its earnings release that tariff-induced price hikes were inevitable, President Trump attacked Walmart, saying "the company should absorb the tariff costs."

Previously, when Amazon.com tried to indicate tariff-related price increases on its Marketplace site, the White House criticized Amazon, calling it a political act. Thus, it is speculated that companies wishing to avoid friction with the Trump administration are deferring price hikes as long as possible.

The May CPI data is likely to put the Board of Governors of the Federal Reserve System in a difficult position, as more time may be needed to gauge the inflationary impact of tariffs. This increases the likelihood that Trump will intensify his pressure on the Federal Reserve for interest rate cuts.

Junga Kim, Contributing Reporter kja@hankyung.com