UBS Economics-US Economic Perspectives _US Inflation Monthly Probably not...-116025421

ab18 June 2025Global ResearchUS Economic PerspectivesUS Inflation Monthly: Probably not June eitherModest May increases, June still moderate
In May, for the fourth month in a row, the core CPI increase was below our expectations. The modest 13bp increase was held down by a continued slowing in core services prices and biased seasonal adjustment. May PCE prices are estimated to post a moderate 17bp core increase with 12-month core PCE inflation likely to rise from 2.52% to around 2.64%.
While we expect larger increases for the core and headline CPI in June than in May, the June increase should still be fairly moderate. We currently project a 22bp seasonally adjusted core CPI increase and a 20bp headline CPI increase. (On an not-seasonally-adjusted basis we projected a 25bp headline CPI increase, which is about 8bp lower than recent CPI swaps fixings.) We have lowered our projected June increase about 10bp partially to reflect the continued downside surprises, but, more importantly, to better align our projection with the CPI methodology on new vehicles, which passes through a change in market prices for new vehicles into the CPI only slowly over the course of a year.Still waiting on tariff effects
Given the modest CPI increase in May we are hearing more clients and commentators wonder "where are the tariffs?". This chorus is expected to be even louder a month from now after another moderate CPI print.
We expect the tariff impacts to be clearer starting in the July CPI released on August 11. A rise in the core CPI increase in July is a result of both rising pass-through of the tariffs and a reduction in the downward bias of the current core CPI seasonal adjustment. From July to October core CPI increases are projected to hover between 35bp and 40bp per month — a notable pickup from the 14bp average over the past three months, but an average of 6bp per month lower than we had projected a month ago.
With possible changes to tariff policies there is considerable uncertainty surrounding this projection, and it will be revised as new information and new policies warrant. A detailed forecast spreadsheet is available on our website. Core PCE inflation: 3.4% in 2025, 3.0% in 2026, 2.4% in 2027
The downside surprise in the May CPI, along with pushing out the tariff effect on new vehicle prices, has lowered our inflation forecast for 2025. On the other hand, our forecast remains well above the level prior to the April 2 tariff announcements. Specifically, our core PCE price inflation forecast now sits at 3.4% for this year (2025Q4/Q4), down from 3.6% last month and 4.4% following the "Liberation Day" ramp up of tariffs, but up from 2.7% in March. While the forecast this year is lower, we have nudged up our core PCE price inflation projection for next year from 2.9% to 3.0% on stronger new vehicle price inflation next year.
Our headline inflation forecasts for this year are revised down less than our core inflation forecasts. This is a reflection