By Alicia Wallace, CNN

(CNN) — Inflation rose less than expected in May, a month when the effects of higher tariffs were starting to become more widespread.

Consumer prices rose 0.1% last month, while the annual inflation rate increased to 2.4% from a four-year-low of 2.3% notched in April, according to the latest Consumer Price Index data released Wednesday by the Bureau of Labor Statistics.

The better-than-expected inflation reading is welcome news for Americans worn down by the higher cost of living and who are fearful of whether tariffs will drive that higher. However, while the tariff impacts weren’t prevalent in Wednesday’s report, the latest CPI was lightly pockmarked with potential indications of price hikes and weaker consumer demand.

May’s overall inflation readings came in better than expected. Economists had projected that falling gas prices would keep the overall monthly inflation rate in check while year-ago comparisons became less favorable.

Forecasts called for a 0.2% monthly rise and for the CPI to increase 2.5% on an annual basis, according to FactSet.

Wednesday’s report was “pretty unambiguously good,” said Michael Pugliese, senior economist at Wells Fargo.

“It was a good reading in terms of looking for softer inflation,” Pugliese told CNN in an interview. “I think it’s too early to draw any conclusions from whether the tariffs are having ‘X’ effect or ‘Y’ effect.”

Stock futures jumped higher after the data release, and the Dow was around 165 points higher by midday, or 0.38%. The S&P 500 rose 0.15% and the Nasdaq Composite gained 0.18%.

For now, a closely watched measurement of underlying inflation is holding steady.

The core CPI, which excludes the highly volatile categories of food and energy, rose just 0.1% from April and held pat at 2.8%.

Economists have anticipated that price pressures would continue to build as businesses try to adapt to President Donald Trump’s sharp escalation in the US tariff rate and unpredictable trade policy.

However, they’ve also cautioned that it may take some time before higher tariff rates result in pricier items for consumers and, ultimately, higher inflation rates.

Among the key reasons for that: Economic data is lagged; there have been significant shifts in tariff policy, and some of the most aggressive duties were curtailed, paused or lessened; businesses front-loaded purchases, building up their pre-tariff inventory and offering up discounts to keep from alienating customers; and some costs from the initial waves of new tariffs might have been absorbed by retailers and manufacturers.

“Bear in mind that this report covers May, and most of the big tariff changes didn’t occur until April or May,” Pugliese said. “I always like to remind folks who expect the economic data to respond like markets do, and that’s just not quite how it works. In the real world, companies are not going to make super-snap hiring decisions, investment decisions, price decisions — particularly when there is so much uncertainty.”

“This is something that plays out over a number of months,” he added.

‘We had held out for long enough’

Some businesses faced with higher tariff bills have opted to raise prices immediately, while others have tried to draw out the spillover to customers.

In mid-May, for example, Walmart’s CEO said the world’s largest retailer would “do our best to keep our prices as low as possible” but that price hikes would begin later in May.

Companies like Lalo, which sells a variety of products for babies and toddlers, have some of the greatest exposure to tariff risks. The overwhelming majority of baby products (99% of car seats, for example) are sourced from China, according to research from Jason Miller, a professor of supply chain management at Michigan State University.

Michael Wieder, who co-founded Lalo with Greg Davidson six and half years ago, has tried to keep customers aware of what the company was navigating. He delivered a weekly “Tariff Tuesday” email to show how the company — which this year got a big foot in the door at Target — is navigating the choppy tariff waters.

But the recent “Tariff Tuesday” e-mails came with some unwelcome news: After months of holding off, the company would have to raise its prices.

On Tuesday, Lalo laid out how prices for the majority of their products would increase as of June 23.

“We had held out for long enough, but we have goods coming in now that are facing a 30% to 55% tariff, and others at 10%,” said Wieder. “It’s hard to explain to everybody that we need to keep the lights on. We need to pay our employees. This is not about increasing profits. Our profits are not growing because we’re increasing prices — in fact, the opposite.”

Lalo is eating a good portion of the higher tariffs, while the company’s retail partners have absorbed higher costs as well, Wieder said.

“We tried to put the smallest amount on the consumer that we possibly could,” he said. “And we worked hard on that. We’ve run a million scenarios that are in the garbage, because things have changed so fast and so frequently.”

Hints of tariff-related increases

The overall price hikes seen in the May CPI report were largely driven by housing-related inflation. The shelter index (which measures the cost of living in a home) rose by 0.3% for the month but saw inflation slow to 3.9%, the lowest rate since November 2021.

Grocery and restaurant prices moved higher for the month, rising 0.3%, as well; however, egg prices dropped for the second month in a row, falling 2.7%.

Services inflation was fairly muted, which economists say could indicate softer demand and a consumer pullback; however, certain declines in categories such as air fares could be attributable to seasonal adjustment calculations made by the BLS, said Alan Detmeister, an economist at UBS Investment Bank.

In terms of calculations, it was unclear whether the BLS’ recent reductions in collections were affecting data, he added.

Wednesday’s CPI report showed very little widespread impacts from higher tariffs; however, certain tariff-sensitive goods industries are showing notably sharper price hikes.

Appliance prices rose by 0.8% for the second month in a row, the highest monthly rate in nearly four years. Toy prices climbed for the second consecutive month, leaping by 1.3% from April.

Sporting goods and tools showed similar pricing trends as well.

Apparel prices, however, dropped 0.4% for the month.

The May CPI data shouldn’t be taken as an indication that foreign manufacturers are paying for the tariffs, noted Preston Caldwell, chief US economist at Morningstar.

That notion is “not supported by the broader economic data; the US dollar hasn’t strengthened and import prices excluding tariffs haven’t fallen,” he wrote in a note on Wednesday. “Who then, is paying for the tariffs right now? By process of elimination, US businesses who import goods must be eating the cost right now. These companies can’t shoulder this burden forever, which still strongly suggests that consumer price inflation is going to tick up in coming months.”

To what extent businesses are continuing to use their margins to absorb price increases could become clearer in data coming out later this week. The Producer Price Index, a critical gauge on wholesale-level inflation, will be released Thursday morning.

But, for now, the totality of the economic data isn’t expected to draw out Federal Reserve policymakers from their monthslong stint as wallflowers, economists say.

“The latest CPI data will keep data-dependent Fed officials comfortably numb,” Gregory Daco, EY-Parthenon’s chief economist, wrote in a note on Wednesday. “With inflation not yet showing signs of a significant reacceleration and headline job gains still solid, there appears to be little urgency to act.”

But beneath the surface, Daco cautioned, job gains are weakening, layoff announcements are growing and the unemployment rate is holding steady on lower labor force participation — pressured downward by reduced immigration.

“The risk? Policymakers may be numbed into inaction just as economic cracks deepen,” he wrote.

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