U.S. Inflation Cools, but Trade War Wildcards Threaten a Bumpy Road Ahead

Lower Inflation Trend Holds, but Uncertainty Looms

Recent economic data show that U.S. inflation is moderating, with both consumer and producer prices rising at a slower pace than in previous years. However, the path to the Federal Reserve’s 2% target remains uncertain, with new trade policies and global dynamics threatening to reignite price pressures.

Consumer Price Index: Signs of Relief

In May 2025, the Consumer Price Index (CPI) rose just 0.1% from the previous month, undershooting forecasts and marking a continued slowdown in price increases. On an annual basis, inflation stood at 2.4%, a slight uptick from April but still well below the peaks witnessed in the summer of 2022. The core CPI, which excludes the volatile food and energy categories, also increased by only 0.1% month-over-month and held steady at a 2.8% annual rate.

Notably, two of the most persistent inflation drivers—transportation services and shelter—showed signs of cooling. Year-over-year rates in these categories have declined, and gasoline prices are now sharply lower compared to a year ago, providing some relief to consumers.

Producer Price Index: Upstream Pressures Ease

The Producer Price Index (PPI), which tracks inflation at the wholesale level, also pointed to easing pressures. The PPI rose just 0.06% in May and is up 2.6% from a year ago, down from 3.7% in January. This suggests that costs for manufacturers and suppliers are stabilizing, which could bode well for future consumer prices.

Fed Policy and the Inflation Target

Despite the cooling trend, inflation remains above the Federal Reserve’s 2% target. The Fed has responded by gradually lowering its policy rate, which now sits in the 4.25–4.5% range after a series of cuts in late 2024. Most analysts expect further modest rate reductions, with forecasts suggesting the federal funds rate could stabilize between 3.0% and 3.25% by the end of 2025. However, the Fed remains cautious, closely monitoring inflation data and the broader economic outlook before making additional moves.

Tariffs: The New Wildcard

A major source of uncertainty is the Trump administration’s renewed push for broad-based tariffs. In 2025, sweeping duties have been imposed on a vast array of imports, with the potential to affect up to 71% of U.S. goods imports. These tariffs are already being described as the largest tax hike since 1993, with estimates suggesting they could cost the average U.S. household nearly $1,200 this year.

Economists warn that tariffs function as a tax on imports, raising costs for businesses and consumers alike. The impact is expected to be felt most acutely in sectors reliant on imported goods, such as autos, electronics, and manufacturing. J.P. Morgan projects that the new tariffs could boost personal consumption expenditures (PCE) inflation by 1–1.5% this year, potentially pushing overall inflation back up to 2.7% and core inflation to 3.1%. This would not only erode consumer purchasing power but could also slow economic growth, with GDP forecasts being revised downward as a result.

Energy and Housing: Offsetting Forces

While tariffs threaten to push prices higher, other factors are working in the opposite direction. Energy prices, particularly gasoline, have fallen sharply year-over-year, helping to offset some inflationary pressures. Additionally, the housing market has cooled in response to higher mortgage rates, which has helped slow the rise in shelter costs—a key component of the CPI.

Looking Ahead: A Delicate Balancing Act

The outlook for U.S. inflation in the second half of 2025 is finely balanced. On one hand, cooling housing and energy markets, along with easing supply chain pressures, suggest that inflation could continue to moderate. On the other, the full impact of new tariffs has yet to be felt, and there is a real risk that these measures could reverse recent progress by raising costs across the economy.

The Federal Reserve faces a challenging environment: it must weigh the risks of persistent inflation against the potential drag on growth from higher interest rates and trade disruptions. Most forecasts now anticipate inflation will remain slightly above the Fed’s target through the end of 2025, with a return to the 2% goal likely delayed until 2026.

"Tariffs are a tax on imports. How much this tax raises final consumer prices depends on factors such as the elasticity of demand and the extent of exchange rate movement. However, the tax incidence nearly always falls on domestic sellers and consumers, and not foreign producers." — Murat Tasci, Senior U.S. Economist, J.P. Morgan

Bottom Line

• U.S. inflation has cooled significantly from its 2022 highs, with both consumer and producer prices rising at a moderate pace.
• The Federal Reserve is cautiously lowering rates, but inflation remains above its 2% target.
• New tariffs are set to become a major inflationary force, with economists warning of higher prices and slower growth if they remain in place.
• The interplay of these forces will shape the inflation outlook—and the broader economy—for the rest of 2025 and beyond.

As the U.S. navigates this complex landscape, consumers, businesses, and policymakers alike will need to stay alert to shifting pressures and new economic wildcards.