US consumer inflation data for May has provided a surprise upside, contrary to forecasts for increased cost pressures as a result of tariffs. According to June 2023 Consumer Price Index data, annual headline inflation jumped only 0.1% compared to April. This figure would represent a decrease from the predicted increase of 0.2%. The net effect was to bring year-over-year aggregate inflation down to 2.4%, just below the anticipated 2.5%. Core inflation remained firmly at 2.8% y/y. This relative stability flew in the face of initial forecasts that it would rise to 2.9%.
These inflation figures appear at a time when trade tensions and tariffs have overshadowed economic discussions. Analysts point out that effective tariff rates on China are probably more like 40%. US tariffs – when calculating for all tariffs imposed – are closer to 15% – 20%. Despite these pressures, the Consumer Price Index (CPI) report suggests that businesses have been cautious in passing through these rising costs to consumers, resulting in modest inflationary responses.
Market Reactions to Inflation Data
Whatever inflationary data comes out next has moved the financial markets the most since Friday’s CPI report. Those soft inflation figures sent Treasury yields reeling. The US 10-Year Treasury yield plunged 10bps to 4.40% from a yield of 4.50% on the run prior to CPI release. This marked drop underlines the magnitude of investor worries about weak inflation and what it might mean for future monetary policy.
Yields of Treasury securities fell sharply. In response to the inflation surprise, the US dollar broadly weakened. Analysts see traders’ interpretation of this reaction as indicative of a heightened trader sensitivity to the changing economic outlook due to uncertainties caused by tariffs.
Consumer inflation expectations have skyrocketed. Real-world inflation today is still gossamer thin, but the climate, apparently, is changing… fast. This discrepancy raises questions about how future economic policies and tariff negotiations will influence both consumer behavior and market dynamics.
Tariffs and Trade Negotiations
Just last week, President Donald Trump reaffirmed his intention to extend the tariff pause deadline beyond July 8. He wants to bring complete trade negotiations to a conclusion with 18 major US trading partners. Given the above, this statement is either confusing or disingenuous, as it implies that the administration is genuinely interested in balancing ongoing trade challenges with inflationary pressures domestically.
As noted, Trump has already committed to setting unilateral tariff rates within two weeks’ time. This latest attempt at intervention would further confuse an already complicated economic and developmental landscape. He lyrically described American coal in remarks last week announcing a new deal with China on rare earth minerals. The initial tariff rates will be 10% on the US side and 55% on the Chinese side. These moves emphasize the competing dynamics between trade policy and inflationary pressure.
In any case, despite the high jump consumer inflation expectations, inflation has been slow to respond to Trump’s trade war so far. This is an oft-repeated claim by many economists—that firms are loath to pass on their higher costs to consumers. This reluctance serves to cool the short-term effect of tariff actions.
Future Implications for Inflation
As market analysts digest the implications of the latest inflation data and ongoing tariff negotiations, they remain cautious about future trends. The muted tone of today’s inflation numbers points to an economy growing less strong than expected.
Core inflation is calm at 2.8% YOY. This stability begs the question of why tariffs seem to be successfully increasing consumer prices. Business and labor experts are watching especially closely to see what trade impacts will be felt. They argue that observed inflation will still take some time to fully react.