by Joe Herrle, CFA
Vice President
Alternative Assets and Portfolio Management
For four consecutive months, economists have predicted that U.S. inflation would surge, largely due to President Trump's trade policies and the anticipated economic impact of his tariffs. However, data from the Bureau of Labor Statistics has consistently come in lower than expected for the fourth month running. The consumer price index (CPI) for May registered 2.4% year-over-year, falling short of the anticipated 2.5% increase.
Tariff Impact Remains Minimal
The May CPI data provides the clearest evidence that the sweeping tariffs have not yet triggered the expected inflationary surge. Despite May being the first full month under the Trump 2.0 tariffs, their impact on price increases was negligible—undeniably positive news for consumers and the broader economy.
However, this outcome doesn't eliminate the possibility of future price increases. The series of below-forecast inflation readings may reflect the fact that many of the administration's threatened tariffs remain on hold. Whether these paused tariff rates will ever be implemented remains uncertain. Nevertheless, even if they are enacted, we expect the inflationary impact to be manageable and unlikely to derail the current economic expansion. For more context, read our recent white paper on tariffs here.
Broader Economic Indicators Show Mixed Signals
While tariffs have had minimal impact on inflation, other economic indicators reveal more noticeable effects. Continuing jobless claims have reached their highest level since November 2021, tracking individuals who have been collecting unemployment benefits for more than a week. This trend suggests that unemployed Americans are facing greater difficulty securing new employment.
These employment challenges precede expected impacts from DOGE-related buyouts, which are likely to appear in unemployment claims between late September and early October. Additional job losses may result from potential solar subsidy cuts included in reconciliation legislation.
Consumer behavior data also signals economic caution. Credit card spending data shows a notable slowdown since mid-May, indicating that households are reducing their expenditures.
Economic Outlook Remains Cautiously Optimistic
The current data points to an economy that is slowing but continuing to grow. The United States maintains several positive economic fundamentals: inflation remains benign, corporate earnings remain strong and unemployment levels stay very low. While certain indicators warrant monitoring, the overall economic picture suggests continued, albeit more measured, growth ahead.
Takeaways for the Week
U.S. stocks rose this week, with the S&P 500 moving closer to a record high as markets responded positively to a favorable inflation report and positive trade negotiations between the U.S. and China.
Next week, the Federal Reserve is expected to hold interest rates steady at its June FOMC meeting, as inflation remains above the 2% target and uncertainty persists around tariffs, though investors continue to anticipate rate cuts later in 2025