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Tariffs

US Inflation Accelerates in May, Tariffs to Take Center Stage

Strategic Insights

— 2 min read

Economists anticipate a pick-up in US inflation in May, driven by the effects of President Donald Trump's tariffs. According to Reuters polls, consumer prices are expected to rise 2.5 per cent annually in May, up from 2.3 per cent in April. Core inflation, which strips out volatile food and energy prices, is also forecast to accelerate to 2.9 per cent in May from 2.8 per cent in April. Analysts at Bank of America predict that tariffs will have a broader impact on the data, with a potential 8.8 per cent month-over-month spike in audio equipment prices. However, a fall in vehicle prices due to seasonal factors may prevent a larger overall increase in goods inflation.

Key Takeaways:

  • Economists forecast a 2.5 per cent annual rise in consumer prices in May, up from 2.3 per cent in April.
  • Core inflation is expected to accelerate to 2.9 per cent in May from 2.8 per cent in April.
  • Tariffs imposed by President Trump are expected to have a broader impact on the data, particularly on audio equipment prices.
  • A fall in vehicle prices due to seasonal factors may prevent a larger overall increase in goods inflation.
  • The Federal Reserve may maintain the current level of interest rates due to elevated inflation risks, despite traders scaling back bets on rate cuts in the futures market.
  • Bank of England policymakers may consider further rate cuts if the data points to a faltering economy and moderating pay.
  • Emerging market currencies, such as the Hungarian forint and the Czech koruna, have been among the main beneficiaries of dollar weakness this year, with a spot return basis of over 10 per cent.

Statistics:

  • Forecasted annual rise in consumer prices: 2.5 per cent (May)
  • October 2019 | Federal Reserve interest rates: 2% | US unemployment rate: 3.6% | Consumer Price Index (CPI) 12-month change: 2.2%
  • Core inflation forecast: 2.9 per cent (May)
  • Audio equipment prices: +8.8 per cent (month-over-month)
  • Vehicle prices: -2 per cent (seasonal factors)
  • Emerging market currencies:

+ Hungarian forint: +10.3 per cent (spot return basis)

+ Czech koruna: +10.1 per cent (spot return basis)

+ Bulgarian lev: +10.2 per cent (spot return basis)

+ Polish zloty: +10.4 per cent (spot return basis)

+ Brazilian real: +14.3 per cent (total return basis, including income from high local interest rates)

Sources:

  • Reuters: Economists polled on US inflation expectations
  • Bank of America: Analysts comment on tariffs' impact on data
  • Federal Reserve: Interest rates and economic data
  • Bank of England: Monetary policy decisions and inflation forecasts
  • Ninety One: Emerging market bond and foreign exchange portfolios
  • Deutsche Bank: Analysts' note on Hungarian forint and EU relationship
  • Bloomberg: Economic data and market analysis

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