Traders Eye May CPI Report as Inflation Gauge and Fed Test Ahead of Rate Decision

Will Tariffs Show Up in Core Goods Data?

Markets are on edge ahead of Wednesday’s Consumer Price Index (CPI) release, expected to show a modest inflation pickup that could shape near-term Federal Reserve policy and rattle key asset classes. The report, due at 8:30 a.m. ET, is forecast to show a 0.2% monthly rise in headline CPI for May, in line with April. However, a 0.3% increase in core CPI—excluding food and energy—has drawn focus as traders assess the impact of new tariffs.

Core CPI is expected to rise 2.9% annually, up from 2.8% in April, while headline CPI may increase to 2.5% from 2.3%. Economists say the report will be the first real test of how quickly tariffs imposed in April are feeding into consumer prices, particularly through core goods—an area that includes household items, apparel, and electronics. Morgan Stanley expects firmer pricing in these categories, while Goldman Sachs sees potential increases in recreation and communications sectors.

Fed Holds for Now, but July Cut Still in Play

The Federal Reserve is widely expected to hold interest rates steady in June, with a 99% probability priced in by futures markets, according to CME FedWatch data. However, the inflation picture could shift expectations for July. Some Fed officials remain concerned that rising core inflation—even if tariff-driven—could delay the rate cuts markets have been pricing in.

Lazard’s Ronald Temple notes that companies are quietly raising prices to protect margins from tariffs. Meanwhile, Bank of America expects a “broader” impact from tariffs in May data, and Wells Fargo says April’s rise in core goods could signal the start of a more persistent trend. Still, Interactive Brokers’ Jose Torres sees inflation as manageable for now, suggesting that services-heavy consumption may cushion tariff impacts.

Dollar, Treasuries and Gold Brace for CPI Surprise

The U.S. dollar remains firm ahead of the data, supported by elevated Treasury yields and market caution on Fed rate path assumptions. A stronger-than-expected CPI print could lift yields further, pressuring rate-sensitive sectors and weighing on gold. Conversely, a cooler reading would reinforce dovish bets and support gold and equity markets.

With core inflation nearing 3%, any upside surprise could add pressure to delay easing, despite broader signs of economic deceleration. Yields on the 2-year Treasury, often sensitive to Fed expectations, may be particularly reactive.

Market Forecast: CPI Will Likely Reinforce Fed Caution

Unless the CPI report significantly misses to the downside, traders should expect the Fed to maintain a cautious stance through June. A slightly higher core reading could firm the U.S. dollar and push yields higher, tilting the outlook bearish for gold and near-term equity upside. Watch core goods data closely—if tariffs are embedding faster than expected, July cuts may be deferred.

More Information in our Economic Calendar.