U.S. inflation continued its cooling trend in May, with the Consumer Price Index (CPI) showing annual inflation at 2.4%, slightly below April’s 2.5% and matching market forecasts.
Core inflation, which excludes volatile food and energy prices, eased to 2.8% year-on-year, coming in below the expected 2.9%. This marks the fourth consecutive month that inflation data has come in below expectations.
Despite this gradual disinflation, the Federal Reserve is unlikely to rush toward interest rate cuts, according to Nigel Green, CEO of deVere Group.
"Inflation is cooling – but not decisively - and with tariffs now feeding back into prices while the real economy is slowing, the Fed finds itself boxed in," Green said.
The deVere CEO expects the central bank to maintain current rates at its meeting next week and likely throughout the summer. He noted that even if markets begin pricing in cuts again, a September rate reduction remains uncertain.
The latest inflation data follows a resilient U.S. jobs report released Friday, which indicated continued tightness in the labor market despite signs of economic softening.
"Wage growth is still strong. Consumer demand is still running. But at the same time, business investment is faltering and debt issuance is surging. It’s a precarious balance," Green said.
Adding complexity to the economic picture, tariffs are acting as a counterforce to disinflation. A federal appeals court ruled Tuesday that President Trump’s "Liberation Day" tariffs could remain in force while it considers whether the White House has legal authority to impose these levies.
"Tariffs are inflationary by design. They’re now pushing against the Fed’s disinflation goal at exactly the wrong moment – just as growth indicators begin to crack," Green warned.
The deVere Group advises investors to reassess their portfolios, suggesting that sectors with pricing power and cost flexibility – such as automation, energy, and selected infrastructure – remain attractive investments. Meanwhile, debt-heavy, rate-sensitive market segments face increased risk.
Green also highlighted concerns in the bond market, noting that "With U.S. debt issuance at record levels and foreign demand weakening, yields are likely to stay elevated. That has major implications for asset pricing and refinancing risk across the economy."
Looking ahead to the second half of the year, deVere expects market sentiment to fluctuate between hopes for monetary easing and fears of economic stagnation.
"Markets want a story. Today’s CPI gave them a narrative of progress. But the Fed won’t cut on sentiment. It will wait for data – and that data remains mixed," Green concluded.