From Ports to Prices: Tariffs Haven’t Fully Rippled Through Inflation Data, Yet!

Former Global Chief Economist for JPMorgan Chase (Ph.D. in Economics) & Current Global Keynote Speaker

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The May Consumer Price Index report follows the implementation of new import tariffs earlier this year, with a phased rollout affecting a wide range of goods from China and other major trading partners. While these levies were imposed only recently, forward-looking data and anecdotal evidence suggest that U.S. consumers so far haven’t fully reflected the expected hit from such tariffs.

Inflation watchers in U.S. financial markets surveyed in advance of the release expected a moderate +0.2% increase in the CPI, with a +0.3% month-over-month rise in core CPI. The actual figures revealed some encouraging news with a +0.1% (MOM%) and a +2.4% (YOY%) increase in the headline figures, and corresponding gains for the core CPI of +0.1% (MOM%) and +2.8% (YOY%), indicating a slight pause in inflation during May 2025.

While it is not entirely accurate to say that we have no inflation, it is correct to say that higher tariff prices have not been fully passed on to U.S. consumers.

Source: U.S. Bureau of Labor Statistics

The Federal Government collected $68.9 billion in tariff revenues during the first five months of 2025, and the big question is whether the lion’s share of these tax revenues will come at the expense of corporate profits or higher prices for consumers? As President Trump reminded us today, the U.S. and China have tentatively agreed to a deal where tariffs will equal 55% for Chinese imports while U.S. imports will face 10% tariff charges in China! Factset, a popular institution that estimates corporate profit margins, revealed that in Q4:2024, corporate profit margins for the S&P 500 (that captures the largest U.S. companies) were hovering around 12.1%, which means that U.S. companies will not be able to absorb a 55% tariff rate on Chinese imports on a sustainable basis without passing some of the costs on to U.S. consumers.

Core Goods in the Crosshairs

Historically, the most direct impact of tariffs is evident in the core goods components of the CPI, where pricing is particularly sensitive to international supply chains. For May 2025, core consumer prices rose by 2.8% on a year-over-year basis. The following components deserve scrutiny:

The clothing and apparel category should be viewed as an early indicator of the impact of tariff price increases. The good news is that so far, retailers have not increased prices as much as they are reporting to the Federal Reserve (in surveys), indicating they are raising prices. Retail giants such as Walmart and Target have already flagged price hikes beginning in late May and continuing into June. The good news is that price increases among retailers did not appear in the May data. However, electronics and household goods did experience some price pressures as containerized imports, subject to new duties, began to hit shelves.

On a related front, J.M. Smucker, which sells Folgers, Dunkin', and Café Bustelo coffee brands, reported yesterday that it has experienced a surge in coffee bean prices.

Energy Prices

Although energy prices dropped again in May by a whopping -1.0% (MOM%), the outlook for future energy prices remains cautious through 2026. Prices will continue to decline only if the U.S. economy weakens further and reduces its energy demand, or if OPEC lowers prices by increasing its oil output. In the U.S., despite a policy of “drill, baby drill,” the Energy Information Administration (EIA) projects a decline in U.S. oil production in 2026. Lower energy prices are discouraging shale companies from drilling for oil, as they aim to avoid incurring losses.

Beige Book and Fed Commentary: Businesses Are Already Reacting

The Federal Reserve’s most recent Beige Book, prepared by the St. Louis Federal Reserve, revealed that businesses across multiple districts are already passing higher import costs on to consumers. In manufacturing and retail, firms report margin pressures directly linked to tariff-driven increases in input costs. Some sectors reported 20–25% increases in key components, resulting in final goods price hikes of 5–10%.

Fed Governor Adriana Kugler spoke candidly about the dilemma during a recent panel discussion. “The first-order effect of tariffs is higher inflation, particularly in goods categories,” she stated. “But the second-order effects—reduced investment, slower hiring, and dampened demand—pose risks to the broader economic outlook.”

Meanwhile, it was encouraging to hear that the trade talks between the U.S. and China, probably the most important “trade discussions so far,” ended positively in London. The tentative agreements will now be presented to President Trump and President Xi for final approval or counterproposals. If the deal materializes, it will mark a significant turning point in limiting additional one-time increases in consumer prices expected from higher tariffs.

Why This Report Matters

While much of the tariff impact is expected to be felt more fully in the June and July CPI reports, today’s data was encouraging. For the past few months, inflation has shown signs of moderation, and the Fed remained cautiously optimistic about the possibility of rate cuts later this year. However, tariff-driven inflation could complicate that assessment.

Core goods inflation has been subdued for much of the past year. But according to Fed staff projections and academic estimates, the current round of tariffs could add as much as +0.3% to +0.5% to core CPI by the end of summer.

With today’s modest rise in some tariff-sensitive categories, one can interpret this evidence as validation of those forecasts. Conversely, a muted response may lead to a "wait-and-see" attitude, as businesses might still be absorbing costs or delaying price adjustments.

Headline vs. Core: Where to Focus

While headline inflation, driven by energy and food, can be volatile, most economists agree that core CPI, which excludes those components, is the more telling gauge of tariff effects. That’s because tariffs disproportionately affect non-energy imported goods rather than domestic commodities.

Still, food prices (which are rising at a yearly pace of +2.9%) should not be ignored. Tariffs on agricultural products and production inputs may soon begin feeding into grocery store prices, though that effect is expected to be more visible in the June and July data. We should not ignore that in prior work, we have reported that all major retailers that also sell food products have profit margins below 3.0%, which means that any tariff rates above this rate cannot be absorbed on a sustainable basis!

Summary and Concluding Thoughts

Today’s CPI report revealed that headline consumer prices are rising by 2.4% while consumer prices, excluding food and energy, rose by 2.8% at a yearly pace. Both price metrics remain above the Federal Reserve’s 2.0% inflation growth target.

Federal Reserve officials have suggested that policymakers may face a difficult trade-off: allowing higher inflation to persist for a few months or risking a premature tightening of monetary policy due to weaker economic growth. Markets have factored in some of this uncertainty, but after today’s CPI report was released, we noticed that the 10-year Treasury yield fell from 4.51% to 4.4%!

With the Fed’s next policy meeting just a week away, today’s CPI could influence both messaging and market expectations. While most analysts expect the most visible price increases to arrive in the June and July data, the May 2025 report offers the Fed some encouraging news for now.

Meanwhile, financial markets will closely monitor the reactions of President Trump and President Xi to the tentative trade agreement between the U.S. and China, reached in London, to refine their estimates of the future trajectory of consumer prices.