Inflation Reloading: ISM Prices paid signals renewed price pressures ahead

The latest US Consumer Price Index (CPI) reading showed a modest increase to 2.4%, largely subdued by falling oil prices and a drop in airline fares. However, underlying inflationary forces are building, likely pushing US CPI above 4% soon.

Following tariff hikes implemented in April, businesses across the US are now grappling with rising input costs. A 10% import tariff has been imposed on most foreign goods, with even steeper rates applied to Chinese imports. While companies had built up inventories in Q1 to get ahead of these tariffs, those stockpiles are now being drawn down. As new, higher-cost imports enter the supply chain, the resulting increase in input costs is expected to ripple through to end consumers.

Survey data support this view. The May ISM report revealed a sharp uptick in input costs across both the manufacturing and services sectors. These increased costs are likely to be passed on, or at least partially, to customers, setting the stage for higher consumer prices. However, this transmission typically occurs with a lag of one to two quarters. Based on current ISM Prices Paid levels, CPI inflation could climb above 4% in the months ahead.

Against this backdrop, the Federal Reserve kept its policy interest rate steady at 4.25%–4.5% during its policy meeting on Wednesday. The Fed cited rising inflation risks due to tariffs and accordingly revised its inflation forecast (based on the PCE index) for 2025 up to 3%. At the same time, the central bank lowered its growth outlook for the US economy to 1.4%. Fed Chair Jerome Powell adopted a cautious tone, indicating that the Fed is awaiting further data before adjusting its stance in response to emerging inflationary pressures.