Truflation: US Monthly Inflation Report – May 2025

Executive Summary

Inflation was relatively muted in April as tariffs implemented in the early part of that month had yet to show up in consumer prices, but the month of May is a different story.

Consumer spending has slowed down sharply posting just a +0.2% increase MoM, which was in line with the consensus but definitely slower than the +0.7% increase in March.  A more cautious consumer mood also was reflected in the personal savings rate, which jumped to 4.9% up from 0.6 percentage points in March to the highest levels in nearly a year.

Hiring decreased slightly in May, even as consumers and companies braced against tariffs and a potentially slowing economy.  Nonfarm payroll rose 139,000 for the month of May, above the muted Dow Jones estimate of 125,000.  Unemployment held steady at 4.2%.  Wages also grew more than expected with average hourly earnings up +0.4% during the month and +3.9% YoY.   This stronger than expected jobs growth and stable unemployment underlines the resilience of the US labor market in the face of recent shocks.  

As the labor market remains tight with early signs of loosening, combined with inflation gravitating back to the central bank’s 2% target, President Trump has been pushing the Federal Reserve to lower interest rates.  However, policymakers in the Fed have been hesitant to move, as they await the longer term impacts of the president’s trade policy.

At Truflation we are assuming bigger increases in the coming months, including Core Inflation, as costs of the new tariffs are eventually passed on. This is unlikely to be a one off increase either, given that more tariffs are on the horizon, in particular China, the EU, steel and aluminium etc. As a result, it will be no surprise to see Core Inflation increase further, and we expect this to peak later this year between 3%-3.5% - if the current mix of tariffs remain on track.  This would translate into a per household consumer loss of $4,900.

As of the 3rd of June, the status of the tariffs are still evolving with some tariffs in effect and others paused or under legal review.  The average effective tariff rate is currently at 17.8%, which is the highest since 1934. This rate has receded on the trade truce with China. 

Economists worry that tariffs could spark another round of inflation, though the historical record shows that their impact is often minimal. The difference this time is the extent of the tariffs which have been compared to Smoot-Hawley Tariff Act of 1930. No surprise the Fed officials have expressed concern about potential tariff inflation, particularly at a time when concerns are rising about the labor market. Higher prices and slower economic growth can yield stagflation, a phenomenon the US hasn’t seen since the early 1980s.

Exhibit 1 – Customs duty revenue as a percentage of goods imports “Effective Tariff Rate”

Source: Bureau of Economic Analysis; Based on Tariff policy as of the 12th of May.

Economic growth forecasts for the US have been cut by the OECD as President Trump’s tariff turmoil weighs on expectations. The US growth outlook was downwardly revised to just 1.6% this year and 1.5% in 2026.  In March, the OECD was still expecting a 2.2% expansion in 2025.  

Labor market trends

The May Employment situation report saw the addition of +139,000 jobs with nearly half of the job growth coming from health care, which added 62,000 - even higher than its average gain of +44,000 over the past year. Leisure and hospitality contributed +48,000, while social assistance added +16,000. On the downside, the government sector lost -22,000 jobs in May and is down -59,000 since January, as efforts to cull the federal workforce began to show an impact.

The JOLT April report also painted a relatively robust labor market with total available jobs up to +7.4 million. Despite the continued additions to the job market, although at a slower pace, there is a cautionary sign the number of job openings is coming down to the pre-pandemic levels of 6 to 7 million. 

Quits, which is an indicator of worker confidence in their ability to find another job, edged lower falling -150,000 to 3.2 million. Layoffs and discharges, edged higher by +196,000 to 1.8 million - the largest rise in 9 months, suggesting the labor market conditions are softening and returning to more normal levels.

Exhibit 2 – Total NonFarm Job Openings, Hires, Quits & Layoffs & Discharges in 000s

Source: Bureau of Labor Statistics – JOLT Report

Source: Bureau of Labor Statistics – JOLT Report

Other signs of a weakening labor market: the ratio of employed workers to the total population, which fell to 59.7%, its lowest levels since the pandemic. The other is the alternative measure to unemployment that includes discouraged workers, or those who have stopped looking for work, returning to a post pandemic high of 4.5%.

Finally on Thursday, the Labor Department reported weekly jobless claims hit their highest level since October – while continuing unemployment claims remained elevated, indicating its taking longer for out of work people to find a job. It seems we are throttling back, and with inflation set to rise again, the consumer’s dollar won’t go far, which could easily lead to reduced economic activity and reduced hirings. At Truflation, we expect the BLS jobs data to likely fall consistently under 100,000 in the coming months. 

Overall the May Employment report shows the job market standing tall, but when the US companies get more clarity around the tariffs, it is surely only a matter of time before the market starts to strain against those headwinds.  

Household Debt and Credit Status

The latest total household debt continues to increase by +$167 billion to $18.20 trillion in the first quarter of 2025, according to the latest Quarterly Report on Household Debt and Credit.  The main driver of this increase was mortgages, which increased +$199 billion as a result of the continued high interest rates. For the 12th consecutive quarter more homeowners borrowed against the equity in their homes, as home equity lines of credit rose to +$402 billion. 

Auto loans balances declined by -$13 billion to $1.64 trillion, marking only the second time balances have fallen from the prior quarter since 2011. This in part, is explained by the reduction in the number of Auto Loan accounts dropping by -1 million to 108.1 million accounts.  

Credit card balances also fell from the previous quarter, by -$29 billion to stand at $1.18 trillion with a continued record number of accounts that are now open (631.99 million accounts). This fall in outstanding balances is expected and consistent with previous comparisons of Q1 vs Q4.  This is likely explained by the return to normal spending patterns post the quarter 4 festive season.

Exhibit 3 – Household Debt Balances and its Composition in Trillions of $

Source: Household Debt and Credit Report, Federal Bank of New York

The big story however is the overall delinquency rates (in some sort of delinquency) rose significantly from 3.6% in Q4 to 4.3% in Q1 of 2025. This increase is particularly evident among the 90 and 120+ days late as consumers look to push out the repayments but are struggling to manage this in the current macro environment.

Looking at the delinquency rates of 90+ days, we are seeing an increase across the loan types with the biggest increases in HELOC, Credit Cards and Student loans which have shot up. There are now nearly 43 million individuals – one in six adults – that have federal student loan debt and the portfolio now exceeds $1.6 trillion. With the Department of Education resuming the collection of its defaulted loans (5th of May), which it has not collected since March 2020, the status on the student loan debts is:

• More than 5 million borrowers have not made a monthly payment in over 360 days and sit in default, many for more than 7 years. There are 4 million borrowers that are in late stage delinquency (91-180 days) and as a result there are nearly 10 million borrowers in default which represents nearly 25% of the federal student loan portfolio.

• Only 38% of borrowers are in repayment and current on their loans.

Exhibit 4 – Percentage of Balance 90+ days delinquent by Loan Type

Source: Household Debt and Credit Report, Federal Bank of New York

With these increases in defaults it is no surprise to see the average FICO score drop marking the first decline in decades. The decline is primarily attributed to the resumption of federal student loan delinquency reporting after the grace period. Elevated interest rates and increased reliance on credit cards are also contributing factors. The average FICO score is likely to drop further as an increased number of student loan borrowers fail to make any repayments.  

One of the key concerns is that this increase in the delinquency rates is not only restricted to the younger age groups, and in fact, is increasing across each of the age groups.

Exhibit 5 – Percentage of Balance 90+ days delinquent by Age

Source: Household Debt and Credit Report, Federal Bank of New York

While the aggregate debt balance is up, Americans’ disposable income has grown as well, but there are going to be plenty of households that are struggling under the weight of higher prices and high interest rates. “These pockets of stress don’t pose much of a threat to the broader economy because the wealthier consumers are still in good shape,” said Shannon Grein, an economist with Wells Fargo.

“So the top 20% of consumers account for about 40% of spending in the US. So you can have these vulnerabilities surface without causing a meaningful deterioration in consumer spending”, Grein said. The risk here is that the strong economy will mask those vulnerabilities, and how much further the delinquencies rise up the income brackets with the impact of tariffs and macro instabilities.  Cutting interest rates will help those vulnerable consumer groups.

Retail sales edged up +0.1% in April, compared to a +1.7% surge in March. The boost in March was due in part to the purchases of items such as automobiles being pulled forward ahead of the tariff announcement. The most recent April numbers, combined with increased delinquencies, poor consumer sentiment numbers, waning demand for air travel and hotel accommodation, and the sharp decline in tourist travel all together, does raise the suspicion that there is an underlying tone of weakness creeping up in the US consumer.  

Exhibit 6 – Truflation Consumer Confidence

Consumer confidence has rebounded in May after five consecutive months of decline. The rebound in May is likely an outcome of a number of the newly imposed tariffs being put on hold for 60 / 90 days and the outcome of a positive US-China trade deal on the 12th of May. While this boosted consumer confidence, underlying concerns are very present. When the revised tariff deals are announced, we are likely to see a worsening of consumer confidence in the short term. 

Recent inflation trends

Truflation is forecasting that the CPI reading for May will see an increase, with an annualized increase of +2.4% YoY in May from April +2.3% YoY. This projection aligns very closely with the broader market expectations, which ranges from 2.2% to 2.8%. 

It is the core categories that are the main driving force, with a return to an acceleration, while the more volatile categories of food and energy have continued their de-acceleration.  The secondary driver of inflation this month is the prices of goods, as the tariffs start to take a grip. The services sector, however, has continued to remain stubborn given the continued tight labor market and wage growth.

Exhibit 7 – Truflation key inflationary metrics: Goods vs Services vs Core Inflation

The concern for the services sector, according to the Institute for Supply Management, is that it contracted for the first time since June 2024, while businesses paid higher prices for inputs - a reminder that the economy remained in danger of experiencing a period of slow growth and high inflation. The forecasts were for the services PMI to be rising following some easing in the trade tensions between the US and China. This sector accounts for roughly two thirds of the economy.  

Manufacturing, on the other hand, contracted for the 3rd straight month in May, with suppliers taking the longest time in nearly three years to deliver input amid tariffs. The tariff uncertainty has made it difficult for businesses to plan ahead. Supplier deliveries are likely to lengthen given the strained supply chains that could drive inflation higher through shortages. Businesses are also seeking to pass on tariffs, which are a tax, to consumers.

At Truflation we are already seeing inflation start to take a steady increase which we believe will increase further in the coming months.  

Exhibit 8 – Truflation Category Inflation Drivers

With inflation marginally increasing, and with the risks to the upside accelerating, the most significant upward contributing categories to inflation in May were coming from housing, utilities, household durables and transportation with food and communications being the biggest downward contributors. 

Sector-Specific Inflation Analysis

• Household Durables: Prices experienced a notable increase of +0.5% MoM and +2.5% YoY due to a combination of tariffs, particularly those on imports from China, consumer spending began to slow following the surge in the first couple of months and an increase in logistical costs, especially shipping which has increased 41% to $3,527 per 40ft container on the 5th of June, according to Drewry World Container Index. 

• Utilities: Prices rose +0.2% MoM and +3.7% YoY and was evident across all sub-categories. In particular, electricity and natural gas, which is driven by the changing usage of utilities in May as temperatures rise. 

• Housing: Overall housing prices rose another +0.1% MoM and +1.3% YoY. Rentals have finally started to come down from record highs, as supply boosts vacancy and demand slows from the record highs in 2022. The owned housing has seen a +0.2% MoM and +1.6% YoY. Home buying and selling remained sluggish as home sales have been at 75% of pre-pandemic activity for the past three years, even with 7 million jobs added to the economy.  Pent up housing demand continues to grow, though not realized. Any meaningful decline in mortgage rates will help release this demand. 

• Transportation: Prices rose +0.1% MoM and +1.4% YoY. Car prices, particularly used vehicles, have been increasing due to lingering effects of chip shortages, consumer anxieties about impending tariffs and a rush of buying activity as consumers try to secure deals before prices rise further. The initial impact of tariffs on imported vehicles and parts has also contributed to higher prices. Then we have gas prices which typically increase in May due to the annual switch to summer blend gasoline which is more expensive to produce. 

• Communications: Has continued to decline -0.1% MoM and +0.8% YoY in May. This is mainly driven by the increased competition, but we certainly expect this category to continue to drop due to the “Lowering Broadband Costs Consumer Act of 2025”. Introduced to the Senate in May, it aims to address concerns about affordability in the telecommunications market.

• Food: Prices de-accelerated in May +0.0% MoM and +3.3% YoY, given declines in corn and palm oil prices which outweighed increases in butter and meat prices. This combined with increased competition and cutting prices offering more low cost options to attract shoppers. With Walmart announcing their intent to pass on some of the increase of tariffs to consumers starting in early June, it is likely to result in competition to follow suit and reverse the current trends.

Longer term outlook

Moving on from May, it is time to look ahead to the next couple of months. It is clear from Truflation’s perspective that the year on year BLS reported CPI is going to be accelerating again.  The question is, by how much and what is the associated impact on interest rates? 

The BLS CPI is expected to rise +2.4% YoY in May following a marginal cooling from March’s +2.4% YoY to April’s +2.3% YoY.  The challenge going forward is twofold:

• The existing numbers don’t have the full effect of the tariffs included yet. Tariffs announced on the 2nd of April have in bulk been postponed until the 9th of July. It is very likely that some form of the tariffs will be imposed, but to what degree is unknown at present. 

• The month on month percentage change numbers to beat compared to last year for an acceleration in inflation are very low.

Given the BLS CPI YoY is based on non-seasonally adjusted, the next three non-seasonally adjusted monthly comparisons to beat in June, July, and August to see an accelerating in inflation, are just +0.03%, +0.12% and +0.08% (see Exhibit 9)

Exhibit 9 - CPI Month on Month Percent Change Non Seasonally Adjusted

Source: Bureau of Labor & Statistics and Truflation

For the next 7 months the number to beat on a MoM NSA basis is 0.17% and anything greater will result in a YoY CPI number to rise.  If the BLS CPI number reports a MoM NSA  number of 0.2% for May and June the CPI will rise to 2.8% YoY in June. Then add on to this the impact of tariffs which at present is likely to be felt gradually, e.g. the UK trade deal in place now with others to come.  

The impact of tariffs have already started, and in mid May Walmart announced that they would need to raise some prices due to tariffs, specifically those imposed by the administration on imported goods. The CFO John Rainey, stated the increased import costs would be passed on to consumers and that Walmart would do their best to keep prices as low as possible but there is a limit to what they can absorb. Will this start a knock on effect with Target, Kroger etc.? 

The OECD has also adjusted its inflation forecasts for the US, saying higher trade costs, especially in countries raising tariffs, will also push up inflation - although their impact will be offset partially by weaker commodity prices. Their inflation outlook shows significant differences between the US and some of the world’s other economies, e.g. the G20 countries, are now expected to record 3.6% in 2025 down from 3.8% in their March estimate. The projection for the US has risen to 3.2% up from a previous 2.8%. However the OECD also states that it could be closing in on 4% towards the end of 2025.

The current inflation expectation, which essentially is a measure of how much consumers are concerned that inflation will worsen, is not helped by the fears of higher prices from tariffs, and as a result has kept the consumer 12 month expectations sky high to new levels not seen since the pandemic.

Exhibit 10 – Consumer Inflation Expectations (2% is the Fed Target)

Source: University of Michigan & Federal Reserve Bank of New York

Higher inflation expectations can also be self-fulfilling, as Americans think prices will rise and they can take steps that push up costs further, such as asking for higher wages. As for now wages have been cooling. Combine this with the overall employment market, we are likely to see more upward inflationary pressures on goods as well as services. This is a story about inflation as well as about economic growth.

Last month, the Central Bank elected to keep its benchmark interest rate unchanged at 4.25% to 4.5%. The next policy meeting is June 17-18 and according to the CME Fed Watch tool there is a 100% expectation that the interest rates remain unchanged. However, there is a divide emerging among Powell’s fellow policymakers about whether to hold rates steady for some time or get more comfortable about cuts later this year as they try to determine whether any inflation coming from the tariffs will prove to be longer-lasting.  Some policy makers are arguing that the impact of duties will be temporary, a stance that would leave the door open for cuts. 

Conclusion

Starting this month we will be seeing “the return of Inflation”, and it will be enhanced by a number of one-time adjustments as a result of tariffs. Coupled with increasing signs of a weakening labor market, the question in the face of uncertainty is, how resilient will the consumer remain to support the continued growth?   

APPENDIX A

Truflation Category Percentage Change Data

Month-over-Month and Year-over-Year

All Data is based on March 2025

Truflation US Inflation Update - May 2025

Report Presentation Deck

TF 2025 - Inflation Report - US - M5 - Presentation.pptx.pdf

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About Truflation

Truflation provides a set of independent inflation indexes drawing on 30+ data partners/sources and more than 15 million product prices across the US. These indexes are released daily, making it one of the most up-to-date and comprehensive inflation measurement tools in the world. Truflation has been leveraging this measurement tool to predict the BLS CPI number, with a 99.94% accuracy in predicting inflation in the last 12 months.

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