Annual inflation picked up in May after falling to a four-year low the month before as housing costs increased—but a key metric showed that inflation continued slowing, despite President Donald Trump‘s tariff policies taking effect.
Overall prices increased by 2.4% last month from a year earlier, up from 2.3% in April but flat with March, according to the U.S. Labor Department’s consumer price index (CPI) data released Wednesday.
The 0.1% monthly increase in consumer prices was less than what was forecasted by many economists, who were projecting a 0.2% rise, suggesting that upward pressures on prices may not be as intense as anticipated.
As previously, housing—termed “shelter” in the CPI release—was the “primary” inflation driver, growing by 0.3% month over month. However, the 3.9% annual increase in that category was the lowest rate since late 2021.
Core inflation, which strips out food and energy and is often viewed as a better measure of underlying inflation, accelerated at a slower-than-expected pace, increasing 0.1% month over month and 2.8% year over year.
“The slight slowdown in both core and headline inflation comes as a surprise to economists and the market alike, who expected a modest pickup in price growth as U.S. tariffs began to take effect,” says Realtor.com® Senior Economist Jake Krimmel.
Food prices saw a monthly increase of 0.3% in both of the index’s major components—food at home and food away from home, meaning restaurants.
Within the food category, egg prices, which have come to symbolize consumers’ sticker shock at the grocery store, shed 2.7% in May but were still up 41.5% year over year following a deadly bird flu outbreak.
The energy index edged down by 1% month over month, with gas prices seeing a 2.6% decrease for the month of May and a 12% drop for the year, helping slow down the inflation.
Clothing prices retreated by 0.4% on the month, airline fares plunged 2.7%, while cars, both new and used, decreased 0.3% and 0.5%, respectively.
However, a host of other indexes swung up in May, including medical care (+0.2%), motor vehicle insurance (+0.7%), furniture (+0.3%), personal care (+0.5%), and education (+0.3%).
How will the Federal Reserve react?
The Federal Reserve is expected to keep rates unchanged in June, with Personal Consumption Expenditure (PCE) inflation—the Fed’s preferred measure—very close to the central bank’s 2% target and the latest jobs report pointing to a fairly healthy labor market.
However, Krimmel notes that the slight uptick in the May CPI may give policymakers pause, especially as they mull inflationary effects of shifting trade policy.
Trump welcomed the latest CPI figures and once again called on the Fed to cut rates without delay.
“CPI JUST OUT. GREAT NUMBERS! FED SHOULD LOWER ONE FULL POINT. WOULD PAY MUCH LESS INTEREST ON DEBT COMING DUE. SO IMPORTANT!!!” the president wrote on his Truth Social account.
Vice President JD Vance sounded a similar note, posting on X: “The president has been saying this for a while, but it’s even more clear: the refusal by the Fed to cut rates is monetary malpractice.”
Mortgage rates dipped slightly last week but remain stuck in the high-6% range, keeping many would-be buyers on the sidelines during what is typically peak homebuying season.
Notably, rates are unlikely to significantly drop unless inflation levels and expectations soften further—giving the Fed room to cut interest rates.
“Should inflation fears ease and rates come down later this summer, sidelined buyers will re-enter a housing market that looks very different from recent years,” predicts Krimmel.
May data from Realtor.com show more than 1 million active listings nationwide for the first time since 2019, with inventory recovering to pre-pandemic levels in many major metros. Homes are staying on the market longer, price growth has leveled off, and buyers are regaining negotiating power.
