Price pressures moderated in May despite the trade war

Overview

May inflation data was softer than expected despite the tariffs. Underlying price pressures remained on a cooling trend across both the euro area and the US, as well as goods and services. Survey-based US inflation expectations measures spiked sharply higher in April but moderated after the US-China trade deal in May. Commodity prices have remained stable amid less volatile risk sentiment. We expect only one more rate cut from the ECB in September.
Inflation expectations: market-based short-term inflation expectations have diverged sharply after April, with EA expectations well below 2% and US above 3% for the next 12M. Long-term market-based expectations remain well anchored. US consumers' inflation expectations moderated after the US-China trade deal.

US

May CPI surprised to the downside. Consensus had expected a pick-up in core inflation given the tariff pressure on costs, but price pressures moderated from April. Headline CPI grew +0.1% m/m SA (2.4% y/y) while core CPI inflation was +0.1% (2.8% y/y). Housing, food and energy contributions landed close to our expectations, but core goods prices surprised to the downside (-0.04% m/m). Our preferred measure of underlying inflation, core services excluding housing and health care, printed its third negative monthly reading in a row (-0.02%). Overall, it seems firms remain cautious about passing through the tariff hikes onto prices.

Euro

headline inflation decreased to 1.9% y/y (cons: 2.0%) from 2.2%, now below ECB's medium-term target. This decline was mainly due to a reduction in services inflation, which fell from 4.0% y/y to 3.2% y/y, reflected by a monthly price decrease of 0.04% m/m s.a. Most importantly, the May data shows that the strong increase in April was largely influenced by the timing of Easter, as average figures from the past two months confirm the disinflationary trend in the services inflation, with average price increase of 0.25% m/m s.a. We expect headline inflation to remain below 2% in the coming 18 months due to low energy futures, a stronger euro, and falling wage growth. The ECB expects headline HICP at 1.6% in 2026.

China

CPI for May was unchanged at -0.1% y/y but core CPI rose from 0.5 % y/y to 0.6% y/y. PPI deflation dropped to -3.3% y/y from -2.7% y/y.