US Inflation Report: Latest Trends and Analysis

The latest US inflation report is a mixed bag, with some surprising trends emerging. The Consumer Price Index (CPI) rose 0.4% in March, a slightly higher increase than expected.

The core inflation rate, which excludes volatile food and energy prices, ticked up to 0.3% in March, a small but significant increase. This suggests that underlying inflationary pressures are still present in the economy.

The personal consumption expenditures (PCE) price index, a key inflation metric, increased 0.2% in March, its lowest rise in several months. This may indicate a slight slowdown in inflationary pressures.

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Tariffs are running at three times the monthly pace in May 2025 compared to May 2024, with collections significantly higher this year.

Businesses are absorbing a decent amount of the extra costs from tariffs, which is why we haven't seen a meaningful pass-through to broad consumer prices yet.

More than half of businesses impacted by tariffs expect to raise prices within the first three months, according to recent regional Federal Reserve surveys.

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Retailers like Walmart and Target, and carmakers such as Ford and Subaru, have already warned of higher prices in the coming months.

We don't know how much heat companies will take before tariffs start to put pressure on profit margins and they pass these costs onto consumers.

It's still too early to draw definitive conclusions about the impact of tariffs on inflation, but the data suggests that businesses are trying to absorb the costs for now.

The recent inflation report has some interesting implications for interest rates. The U.S. stock market rallied to more records after data suggested inflation across the country was a touch better last month than economists expected.

Lower interest rates seem to be on the horizon, as the market is responding positively to the news. This is a welcome development for many investors and consumers.

The Federal Reserve's next move on interest rates will be closely watched, as it can have a significant impact on the economy.

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The U.S. stock market rallied to more records after data suggested inflation across the country was a touch better last month than economists expected, but inflation rates are still a topic of interest. Inflation rates can be influenced by various factors, including expected inflation and labour-market tightness.

Expected inflation rose over 2021 and 2022, reaching 2.95% in 2022Q4, prompting some to warn that it might be the start of a de-anchoring of expectations from the Federal Reserve’s target. The rise was sharply reversed in 2023, and by 2025Q1 expectations stood at 2.3%, close to their pre-pandemic level.

The labour market's tightness or slack can also impact inflation rates, with a ratio of job vacancies to unemployment (V/U) being a key indicator. The V/U ratio rose rapidly over 2021 and peaked at 2.0 in March 2022, far above the average level of 0.6 over 1985-2019.

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Inflation rates have been on a wild ride over the past few years, and understanding the trends is crucial for making informed decisions about your finances.

The Consumer Price Index (CPI) report shows that tariffs have had a significant impact on consumer prices, particularly in sectors reliant on imports, with the recent June 2025 CPI report highlighting this effect.

A closer look at the chart titled "Consumer Price Inflation % Year-over-Year" reveals that core goods experienced a significant spike in 2021, reaching its peak, before declining sharply in 2022.

Core CPI remained relatively stable from 2018 to 2020, but then began to rise sharply in 2021, peaking in early 2022, before declining steadily through 2023 and 2024.

Core services, on the other hand, maintained a steady increase from 2018 to 2020, with a notable rise in 2021, peaking in 2023, before gradually declining through 2023 and 2024.

The Bureau of Labor Statistics and Haver Analytics data, as of May 31, 2025, show that core goods, core CPI, and core services all experienced key periods of inflationary spikes in 2021 and 2022, followed by a general decline in inflation rates through 2023 and 2024.

Services inflation stayed stable in May, with a 0.2% increase in prices for services like healthcare, entertainment, and shelter.

This is a slightly softer pace compared to both its six- and 12-month averages, which suggests a continued moderation in services inflation.

The deceleration of housing price growth year-over-year is largely responsible for this trend, and it's worth keeping an eye on as it may have a significant impact on overall inflation rates.

Services make up a substantial portion of the inflation basket, so their trajectory will be crucial to monitor in the coming quarters.

If services can continue their disinflationary trend, they may help offset firmer goods prices resulting from tariffs.

Services inflation, which measures prices for services like healthcare, entertainment, and shelter, rose just 0.2% in May, a softer pace compared to its six- and 12-month averages. This is largely due to the deceleration of housing price growth year-over-year.

The trajectory of services inflation will be crucial to monitor in the coming quarters, as services make up a significant part of the inflation basket. If services, particularly housing, can continue their disinflationary trend, they may act as an offset to firmer goods prices resulting from tariffs.

Expected inflation rose over 2021 and 2022, reaching 2.95% in 2022Q4, but was sharply reversed in 2023, and by 2025Q1, expectations stood at 2.3%, close to their pre-pandemic level. This reversal was likely due to the Federal Reserve's tightening and communication over 2022-2023, as well as progress in reducing actual inflation.

The labour market's tightness or slack influences inflation, with the ratio of job vacancies to unemployment (V/U) being a key indicator. This ratio rose rapidly over 2021 and peaked at 2.0 in March 2022, far above its historical average of 0.6 over 1985-2019.

Headline inflation shocks, which are deviations of headline from core inflation, also influence inflation. These shocks can be caused by sharp changes in sectoral prices, such as changes in the relative prices of energy and auto-related items.

Core inflation remains above target levels mainly because V/U remains above its historical norm, with a ratio of 1.1 in February 2025. This implies upward pressure on underlying inflation, requiring a further cooling of the labour market to reduce inflation to the Fed's target.

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The latest CPI reading is a welcome relief for the Federal Reserve, as it limits near-term urgency to change policy rates. This steady inflation picture is expected to influence the Fed's decision to hold rates steady during the June meeting next week.

The labor market is still experiencing upward pressure on underlying inflation, with the vacancy-to-unemployment ratio at 1.1, which is higher than the historical norm. This gap reflects the fact that inflation is currently exceeding the level consistent with the Federal Reserve's target.

A further cooling of the labor market would be required to reduce inflation to the Fed's target, which could involve a significant rise in unemployment as well as a fall in vacancies. However, the inward shift of the Beveridge curve has allowed vacancies to fall without a substantial rise in unemployment since 2023.

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The future of inflation is uncertain, but we can look to recent trends and economic indicators to get a sense of what's to come. In March 2025, 12-month core (median) inflation stood at 3.5%, exceeding the Federal Reserve's target.

The vacancy-to-unemployment ratio, currently at 1.1, is higher than its historical norm, implying upward pressure on underlying inflation. This gap will need to be addressed to bring inflation back in line with the Fed's target.

The good news is that the inward shift of the Beveridge curve since 2023 has allowed vacancies to fall, reducing the vacancy-to-unemployment ratio and inflation, without a substantial rise in unemployment. However, this trend may not continue indefinitely.

If the Beveridge curve stabilizes at its current position or shifts outward again, a significant rise in unemployment will be necessary to normalize the vacancy-to-unemployment ratio. This could have far-reaching consequences for the labor market and economy as a whole.

The future of inflation will also be influenced by external shocks, such as changes in international energy prices or the effects of tariffs on global supply chains. Unfortunately, these shocks can have asymmetric effects, with inflationary shocks passing through into core inflation and disinflationary shocks not having the same impact.

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The starting point of our analysis is a decomposition of headline inflation into two components: core inflation and headline shocks. Core inflation is measured with the weighted median inflation rate from the Federal Reserve Bank of Cleveland.

Headline shocks are measured with deviations of headline inflation from the weighted median. We see that the inflation surge over 2021-2022 reflected both rising core inflation and positive headline shocks.

The vertical line in Figure 1 indicates September 2022, when we completed our earlier work. Both declining core and negative shocks have contributed to the subsequent disinflation.

We can see from the data that the path of CPI inflation since 2020 has been influenced by both core and headline inflation.

Wages and incomes are now rising faster than costs, making it easier for households to adapt to higher prices.

The Census Bureau reported that inflation-adjusted median household incomes rose 4% in 2023, returning incomes back to their pre-pandemic peak.

Many consumers have shifted their spending from name brands to private labels or started shopping more at discount stores, putting pressure on packaged foods companies to slow their price hikes.

This shift in consumer behavior has led to a decline in sales volumes for companies like PepsiCo, which imposed steep price increases on its drinks and snacks.