A milder-than-expected May CPI report is unlikely to shift mortgage rates because tariff-induced inflation remains a threat and the Fed will continue to hold off on rate cuts.
Core prices rose 0.13% from a month ago in May, lower than the 0.27% expected by forecasters, with price increases for tariff-affected categories not yet showing up in the official data. New (-0.3%) and used cars (-0.5%), along with apparel (-0.4%), all fell, which may be surprising given the massive increase in tariff rates from April to May. However, the reality is that it takes time to put in the infrastructure to collect new tariffs at a massive scale and the newly announced tariffs were nowhere near fully implemented in May. Real time data from online retailers shows that the prices of imported goods have been increasing, but still modestly relative to the size of the tariff increases. Given the volatility of tariff policy, businesses along the supply chain may be trying to hold off on passing on price increases for as long as possible hoping that the tariffs eventually come down.
So far this month the jobs and inflation data reflect an economy that has not changed much since Liberation Day, but the Fed will not be able to signal any rate cuts at their meeting next week because they’re still waiting for the other shoe to drop. Ultimately, given the time required for businesses to make pricing and headcount decisions—and for these changes to seep into the official statistics—it could be late summer or early fall before we really know how much of an impact the tariffs will have on the labor market and inflation. As such, the earliest the Fed could entertain a rate cut would be their September meeting, but it’s likely to be December or even early 2026. As long as we’re in suspense, mortgage rates pretty much have to stay close to where they currently are.
