Underlying U.S. inflation rose in May by less than forecast for the fourth month in a row, suggesting companies are largely holding back on passing higher tariff costs through to consumers.

The consumer price index, excluding the often volatile food and energy categories, increased 0.1% from April, according to Bureau of Labor Statistics data out Wednesday. From a year ago, it rose 2.8%.

Goods prices, excluding food and energy commodities, were unchanged. New and used-car prices both declined, as did apparel. Meanwhile, services prices minus energy rose 0.2%, a deceleration from the prior month and reflecting a decline in airfares and hotel stays.

Treasuries rallied, the dollar declined and the S&P 500 opened higher after the report. Interest-rate swaps showed traders see a 75% probability that the Federal Reserve will cut borrowing costs by September.

The string of below-forecast inflation readings adds to evidence that consumers have yet to feel the pinch of President Donald Trump’s tariffs — perhaps because the most punitive levies have temporarily been on pause, or thanks to companies so far absorbing the extra costs or boosting inventory ahead of tariffs.

However, if higher tariffs set in, shielding consumers from those costs will become more difficult, which is partly why economists expect firms to raise prices more meaningfully in the coming months.

“The build-up of inventory in advance of the tariff hikes may be contributing to delayed pass through, while huge uncertainty in U.S. trade policy may have affected the speed with which firms wish to adjust prices,” Brian Coulton, chief economist at Fitch Ratings, said in a note. “But a rise in core goods inflation in the months ahead still looks very likely.”

The risk is that consumers, who are still reeling from years of elevated inflation in the aftermath of the pandemic, will only tolerate so much and eventually pull back spending. Companies like JM Smucker Co. — which owns brands like Folgers coffee and Twinkies — as well as Best Buy Co. have said that will weigh on profit, at the same time forecasters see slower economic growth.

Given the limited pass-through to inflation so far, a steady labor market and continued uncertainty surrounding Trump’s policies, the Fed is widely expected to keep interest rates on hold at next week’s meeting. Nonetheless, with inflation cooling along with the labor market, officials may face more pressure to lower borrowing costs soon.

“For the Fed, the most important caveat is that it’s still a little early,” said Mike Pugliese, senior economist for Wells Fargo. “I don’t think they’re going to put too much weight on one single month’s report given how much has happened over the past couple months.”

Some categories more exposed to higher import duties did show notable increases. Prices of toys rose by the most since 2023, while the costs of major appliances posted the largest advance in nearly five years.

Meanwhile, prices of gasoline — which aren’t included in the core CPI — dropped 2.6%, helping to limit the gain in the overall CPI.

In testimony prepared for a Congress hearing on Wednesday, Treasury Secretary Scott Bessent credited Trump’s policies for the inflation slowdown, saying the president challenged a “decades-old status quo” on trade.

Grocery prices

However, prices for groceries rose 0.3% after declining in April. While shoppers saw higher costs for cereals, fish and bacon, egg prices dropped almost 3%. Ground beef prices rose, likely stemming from a record low cattle herd and high demand.

One of the key drivers of inflation in recent years has been housing costs — the largest category within services. Shelter prices rose 0.3% for a second month.

Excluding housing and energy, services prices rose 0.1%, a deceleration from the prior month. From a year ago, those costs advanced 2.9%. In addition to declines in travel-related categories, recreational services, including admissions to sporting events, also declined in a sign of a pullback in discretionary spending.

While central bankers have stressed the importance of looking at such a metric when assessing the overall inflation trajectory, they compute it based on a separate index.

That measure — known as the personal consumption expenditures price index — doesn’t put as much weight on shelter as the CPI, which helps explain why it’s trending closer to the Fed’s 2% target. A government report on producer prices due Thursday will offer insights on additional categories that feed directly into the PCE, which is scheduled for later this month.

In addition to seeking fairness in bilateral commerce and shoring up national industrial security, the Trump administration says tariffs will help stoke domestic manufacturing and investment over the longer term. Critics say that the tariffs themselves are actually adding to a host of challenges already inhibiting reshoring.

Inflation outlook

Going forward, retailers like Walmart Inc. and Target Corp. have warned of higher prices, as have carmakers including Ford Motor Co. and Subaru Corp. A Fed survey of economic activity last week showed prices advanced at a “moderate” pace across the U.S. in recent weeks, with some regions expecting future increases to be “strong, significant, or substantial.”

Much of the outlook depends on how trade talks evolve. The U.S. and China have reached a consensus to de-escalate their trade war. The temporary agreement that’s currently in place has already helped lower several measures of consumers’ inflation expectations.

Central bankers also pay close attention to wage growth, as it can help inform expectations for consumer spending — the main engine of the economy. A separate report Wednesday that combines the inflation figures with recent wage data showed real average hourly earnings climbed 1.4% from the year before.

(With assistance from Chris Middleton, Matthew Boesler, Reade Pickert, Mark Niquette and Jonnelle Marte.)

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