We wrote last week about the increased importance the labor component of the Federal Reserve’s dual mandate. This week, the second part of the mandate (inflation) got its turn in the spotlight yet again.

First up – Consumer Price Index (CPI) report was released for May and it showed favorable results. The CPI rose 2.4% year over year (below the expected 2.5%), and only 0.1% in the month (below expectations of 0.2%). Core inflation, which strips out food and energy, rose 2.8% year over year.

Many had been concerned about the impacts tariffs would have on inflation – both from absolute price increases as well as increased demand from consumers trying to “front run” the price hikes. However, the data is not yet showing these increases. In areas you’d expect to see tariff flow-thru, declines were observed (example: furniture prices were down 0.8% and clothing prices were down 0.4% and prices for both new and used cars also fell). Price hikes may be coming – but they didn’t arrive in full force in May.

Undoubtedly tariffs remain a wild card. With many of the proposals still “on pause” thru July and the possibility that businesses built up inventories in advance of the policy changes, it may be a matter of time before inflation reignites. But for now, consumer prices are no longer trending higher.

Next, we got a look at wholesale prices via the Producer Price Index (PPI). PPI as well as Core PPI (which excludes food and energy), both rose 0.1%. Analysts had expected a 0.2% rise for headline and a 0.3% rise for Core PPI. Both readings were softer than anticipated. There is some “noise” beneath the surface as the prices of core goods rose, suggesting that companies may be eating the added costs from tariffs (for the time being). Nonetheless, this was yet another encouraging inflation print.

With inflation coming in softer for May at both the consumer and wholesale level, many may believe the threats from tariffs to be behind us. Sadly, that may is not likely the case. It’s probable that there was some front-end purchasing (to get ahead of tariffs). Further, it takes time for price increases to trickle thru the economy and companies may still be wrestling with how much they can pass along to customers as pricing power is diminished after years of price increases and waning demand.

Undoubtedly, slowing inflation reports are a near-term positive for markets. However, the fear of increasing inflation due to tariffs remains a very real potential threat to the economy. Given that, it remains unlikely that the Federal Reserve will be in a rush to lower interest rates at their upcoming meeting. But for now, equity markets and bond markets alike seem pleased with the news and rose modestly on the news. After the past few months we’ve endured, any good news is welcomed!

Onward we go,