More Good Inflation News Continues Path to 2%
Peter Bernstein, Chief Economist pbernstein@rcfecon.com, 312-431-1540 x1515
Louise Collis, Senior Economist
June 12, 2025
The Current Situation
The CPI and core CPI both increased 0.1% in May, resulting in year-over-year inflation rates of 2.4% and 2.8%. respectively. Similarly, the producer price index (PPI) inflation rate came in at 2.6%. Short-term, the CPI inflation readings are even better – the annualized 3-month inflation rate was just 1.0% in May; core was only 1.7%.
Against this good news, two factors suggest that progress on inflation could stall. The first factor is statistical – the CPI was flat in June of 2024 which becomes a tough target to match in June 2025. The second is the impact of higher tariffs on imports. With that, we note that higher tariffs have not shown up in the broad CPI readings, though there is evidence of some specific product prices increasing. The lack of tariff-induced inflation could be because the full impacts are yet to be realized, or because exporting and importing companies are absorbing much of the tariff cost and holding off, at least for now, on pushing those costs on to consumers.
RCF’s Inflation Scorecard
RCF’s Inflation Scorecard is based on analysis of 20 different price series comprising 98% of the total consumer price index. Each of these price series represents a portion of the CPI based on household spending patterns. For example, food purchased for at-home consumption is about 8% of the typical consumer’s budget; it has a weight of 8.04 out of a total index of 100.
Our scorecard presents two metrics to track month-to-month price increases. The first metric is the share of the index for which inflation in the most recent month is rising (greater than the prior month’s inflation) vs. the share of the index for which inflation is falling (lower than the prior month) or prices fell (deflation).
Our first metric shows that 56% of the weighted CPI had falling inflation in May vs April, the best reading since February 2024. Another 17% of the weighted CPI saw prices fall in May (deflation). Added together, 73% of the CPI had either lower inflation or lower prices during the month.
Our second metric shows that 62% of the weighted CPI still has monthly inflation above 0.2%, a monthly figure that corresponds to the Fed’s annual target of 2% inflation. The above 0.2% share has remained elevated since briefly dipping below 50% last summer. Herein is the elephant in the room – inflation is heading lower but is still above 2%. Given the Fed’s commitment to their target, we may not see any cuts in the fed funds rate until inflation declines further.
RCF Inflation Scorecard: May 2025
One broader concern: retail sales fell in April, consumer spending has been weak all year, and household savings have increased. It’s possible that the better inflation data of late is a result of deteriorating demand and increased concerns about the state of the economy. If so, lower inflation may end up being a sign of trouble instead of something to celebrate.
Analysis of Individual Components of the Consumer Price Index
Sources: Bureau of Labor Statistics and RCF Calculations 1. Inflation direction indicates whether monthly inflation in May was higher or lower than monthly inflation in April. Deflation means prices fell in May vs April.
Highlights:
- Food at home and food away from home prices both rose 0.3% and are up 2.3% and 3.8% respectively from a year ago. Food price increases remain a constant annoyance to many shoppers.
- For longer than we can remember, there has been an expectation that the BLS measure of rents will catch up with other measures that show substantial softening of the housing market. It finally appears to be happening with CPI rents increasing just 0.2%, the first time it has hit that critical level since 2021.
- Motor fuel prices fell for the fourth straight month, down 2.6% in May alone and nearly 12% from a year ago.
- Other components showing price declines in May were apparel and new vehicles, two products that might have been expected to be affected by higher tariffs. Apparel prices are down versus a year ago while new vehicle prices are up only 0.4% since May 2024. Used car and truck prices fell 0.5% in May following a 0.5% decline in April.
- Buying a car and filling the tank have gotten cheaper, but insuring it continues to get more expensive. Motor vehicle insurance prices were up 0.7% in May and 7% vs. a year ago. Even worse, auto insurance rates are up a startling 50% over the past three years.
- Average weekly earnings are up 3.9% vs. a year ago resulting in real income gains of 1.5%. Real earnings have been rising faster than inflation for the past two years.
