Inflation remained mild in May, showing little upward pressure. According to last week’s report from the US Bureau of Labor Statistics, the Consumer Price Index (CPI) rose just 0.1% for the month, while the annual rate settled at 2.4%.
The core CPI, which excludes food and energy, also rose 0.1%, suggesting an absence of broad-based price hikes tied to trade tensions. The core CPI is up 2.8% compared to one year ago.
The recent spate of soft inflation numbers is encouraging. Yet, instead of considering additional rate cuts, the Federal Reserve remains focused on the uncertainty surrounding tariffs—particularly their potential to slow economic growth and drive inflation higher.
Aside from a 4.3% increase in the price of major appliances last month and higher coffee and vegetable prices, broad-based price hikes tied to new levies on imported goods have yet to materialize.
Perhaps it’s simply too soon to gauge the inflationary impact of tariffs. Perhaps the absence of a sharp rise in inflation may simply be because tariffs have yet to be fully enacted.
Based on daily Treasury data, May net tariff revenue was about $22 billion, according to the Census Bureau, Treasury Dept., and The Budget Lab at Yale.
That implies an effective tariff rate of around 6.5% in May. A fully phased-in tariff policy implies 18%. Prior to the implementation of the latest tariffs, the effective rate was about 2.5%.
But tariffs put businesses in a difficult position: absorb them and accept lower profits, raise prices to recover the cost, or some combination.
A survey conducted last month by the New York Federal Reserve may provide some insights into any tariff-induced inflation that we may see.
The survey highlighted that about 75% of firms passed along some or all of the tariffs levied, with 31% of manufacturers and 45% of service providers passing along the entire bill.
The survey was limited and focused only on New York and Northern New Jersey, but it provides valuable insights into how businesses might respond to rising costs in the upcoming months.
While higher prices may be on the way, tariffs have yet to be reflected in the CPI. For now, the safest course of action may simply be to observe the data as it’s released.
Israel Strikes Iran: Historical Trends and Investor Reactions
Geopolitical instability often triggers volatility in financial markets, leading to declines in stock prices as investors seek safe-haven assets. Over a longer period, markets usually adjust as investors assess the broader economic implications of geopolitical events.
In other words, how might a geopolitical event impact the US economy?
LPL Research found that, on average, the S&P 500 dropped 1.1% on the first day following a major geopolitical or economic event. This analysis spans 25 historical events, dating back to the attack on Pearl Harbor in 1941. On Friday, the S&P 500 lost 1.13% (MarketWatch).
The average decline was 4.7%, and the average bottom occurred in 19 days. It took an average of 42 days to fully recover losses.
The three steepest S&P 500 Index drawdowns
| Pearl Harbor | 19.8% | |
| Iraq’s invasion of Kuwait | 16.9% | |
| North Korea’s invasion of South Korea | 12.9% |
Source: LPL Research, The S&P 500 Index is unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.
While the situation remains fluid, historically, stock markets have demonstrated resilience, recovering within weeks or months after major geopolitical shocks.