U.S. consumer prices increased less than expected in May as cheaper gasoline partially offset higher housing costs, but inflation is expected to accelerate in the coming months on the back of the Trump administration's import tariffs.
The report from the Labor Department on Wednesday also showed underlying price pressures muted last month. Economists say inflation has been slow to respond to President Donald Trump's sweeping tariffs as most retailers are selling merchandise accumulated before the import duties took effect.
Walmart (WMT.N) last month said it would start raising prices in late May and June. Inflation was also being curbed by slower price rises for rents and declining airline fares. The Federal Reserve is expected to keep interest rates unchanged next week, with financial markets growing more optimistic of a resumption in monetary policy easing in September.
"This report is another indicator that, before tariffs and economic uncertainty, we were well on our way to inflation falling back to target and that the main impediment to future progress is tariff-related price increases," said Daniel Hornung, a senior fellow at MIT.
The Consumer Price Index (CPI) increased 0.1% last month after rising 0.2% in April, the Labor Department's Bureau of Labor Statistics (BLS) said.
A 0.3% increase in the cost of shelter, mostly rents, was the main driver of the rise in the CPI. Food prices rebounded 0.3% after dipping 0.1% in April. Grocery store prices climbed 0.3%, lifted by strong increases for cereals and bakery products as well as other food consumed at home.
Fruit and vegetable prices also rose, but consumers got a respite with a 2.7% decline in the cost of eggs. Meat, fish, nonalcoholic beverages and dairy products also cost less relative to April. Gasoline prices dropped 2.6%.
In the 12 months through May, the CPI advanced 2.4% after gaining 2.3% in April. Economists polled by Reuters had forecast the CPI climbing 0.2% last month and increasing 2.5% year-on-year.
In addition to pre-tariffs inventory, economists say an uncertain demand environment was likely making some businesses hesitant to raise prices. Most economists expect inflation to heat up through the second half of the year and believe companies will raise prices incrementally to avoid a price shock for consumers and attracting the attention of the White House.
Trump last month told Walmart to "eat the tariffs" instead of raising prices. The administration has maintained that the duties, which are a tax, were paid by the exporting countries.
Excluding the volatile food and energy components, the CPI gained 0.1% after rising 0.2% in April. Shelter costs rose 0.3%, with owners' equivalent rent increasing 0.3%. But the cost of hotel and motel rooms eased 0.1%.
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Healthcare costs rose 0.3%, with prescription medication prices increasing 0.6%. Motor vehicle insurance increased 0.7% while prices for household furnishings and operations rose 0.3%. Personal care costs rose 0.5%. But airline fares dropped 2.7%. Prices for used cars and trucks decreased 0.5% while those for new vehicles eased 0.3%. Apparel prices slipped 0.4%.
In the 12 months through May, the so-called core CPI inflation increased 2.8% after rising 2.8% in April.
The Fed tracks different inflation gauges for its 2% target.
The dollar slipped against a basket of currencies. U.S. Treasury yields fell.
The CPI data will come under close scrutiny in the months ahead also for another reason. Last week the BLS, which also compiles other economic releases including the closely watched employment report, announced the suspension of CPI data collection in three cities because of resource constraints.
The BLS, like all government agencies, has been severely affected by mass firings, voluntary resignations, early retirements and hiring freezes, which are part of an unprecedented campaign by the White House to drastically reduce the size of government and remake it.
The BLS has also announced that it would, effective with the release of the July Producer Price Index (PPI) data in August, end the calculation and publication of about 350 indexes. That would include data from PPI industry, commodity, final demand-intermediate demand and special index classifications.
Economists said that the BLS had with the CPI data reported a rise in the share of categories for which prices were calculated using a method called different cell imputation, which some viewed as less accurate.
But the BLS said on Tuesday its published data met rigorous standards. It, however, did not address staffing issues.
"Data quality is evaluated through measures of variance, bias studies, and assessments of survey methods," the agency said in a statement to Reuters. "BLS continues to evaluate data quality."
A former BLS commissioner told Reuters that staff levels were considerably low at the agency.
"I understand that BLS staffing is down by at least 15% now. That's not reflected in any official numbers yet, because many of them are still being paid," said Erica Groshen. "They are not at work and it is impinging on the agencies. Also the hiring freeze means that they can't be replaced."
Groshen said the CPI report remained reliable, noting an increased shift towards electronic collection of data.
