With the U.S. Federal Reserve (Fed) meeting next week to decide what to do about interest rates, this morning’s U.S. inflation reading for the month of May does not provide a lot of guidance with the pass-through effects of U.S. tariffs not yet evident in the data.

Nonetheless, because the inflation rate remains above the Fed’s 2% target we are expecting it to continue to shy away from cutting interest rates for now.

The headline inflation rate south of the border was 2.4% last month, up a tick from 2.3% in April. Lower gasoline prices helped keep the overall price growth in check while the key categories of food, shelter and medical services continued to run above the headline rate.

The core reading, which excludes volatile food and energy prices, remained steady at 2.8%.

With many retailers still selling off pre-tariff inventory combined with the pullback in threatened tariff rates, consumer prices have not yet faced the full impact of the trade war. Inflation is expected to pick up more steam in the second half of the year.

Another inconclusive signal for the Fed came earlier this week with the release of the latest results from its Survey of Consumer Expectations. As of May, Americans expected inflation to be running at 3.2% in 12 months, down from 3.6% in the April survey. Lower inflation expectations should ease the Fed’s anxiety about where prices are heading, but the outlook is still well-above the Fed’s 2% target and could change quickly as the trade war evolves.

With the future path of inflation still fuzzy, the Fed is expected to continue to wait and see before making any changes to its benchmark interest rate.

Like the Bank of Canada, the Fed is stuck between a rock and a hard place:

If it cuts its trendsetting interest rate to help stimulate an economy struggling under the weight of tariffs and tariff uncertainty, this could push inflation up.

If it keeps its policy rate as is (or, unlikely at this juncture, raises it) to keep a lid on inflation, it will not be helping the economy deal with the dampening effects of tariffs and concerns about rising U.S. debt.

We think the Fed will leave its policy rate unchanged next week and after its July meeting, but may have enough data on hand showing an economy in trouble that it will make a cut when it meets again in September.

As for our central bank, we think the Bank of Canada has more room to cut given cooler inflation readings and clearer signs of a flagging economy and labour market. Our current forecast is for three 25-basis point cuts by the Bank of Canada to its policy interest rate by year end.

Answer to the previous trivia question: At 5.93 million, Alberta’s cattle herd reached its largest size in 2005. As of January 2025, the headcount was 4.71 million.

Today’s trivia question: Which province is home to the largest cattle herd in Canada?