Surprising U.S. Inflation Data for May Signals Limited Price Pressure

In a notable development for financial markets and monetary policy, U.S. consumer prices rose by just 0.1% in May, significantly below expectations. As a result, the annual inflation rate edged up only slightly, from 2.3% to 2.4%, while the core inflation rate—which excludes volatile food and energy prices—remained stable at 2.8%. These numbers highlight a continued absence of price momentum, even two months after the U.S. implemented higher import tariffs.

The surprising resilience in price levels can be largely attributed to businesses absorbing cost increases by reducing their profit margins, rather than passing them on to consumers. Eyb & Wallwitz’s chief economist Dr. Johannes Mayr explains:

“Companies have again absorbed the higher costs through a decline in their margins.”

However, this does not mean the Fed can overlook these trends much longer. With inflation persistently coming in below the Fed’s 2% target, Chair Jerome Powell will face increasing pressure to acknowledge the disinflationary environment—both from market participants and the political sphere.

“It will become increasingly difficult for Fed Chair Powell to fully ignore the current very low inflation data,” says Dr. Mayr, adding that “downward pressure on the dollar is likely to remain high.”

Still, for now, investors can interpret May’s inflation numbers as supportive of lower yields, persistent dollar weakness, and potentially more dovish Fed signaling later in the year.

“The price-dampening effect of weaker demand has clearly more than offset the price-increasing effects of higher tariffs in the short term.”

Analysis: What the Latest U.S. Inflation Data Could Mean for Credit Ratings in the U.S. and Globally

While a downgrade of the U.S. sovereign rating is not imminent purely due to inflation, rating agencies may highlight structural fiscal risks becoming more exposed in a low-inflation environment.

The latest inflation figures point to a critical development for U.S. companies: many are absorbing higher input costs from tariffs by compressing profit margins, rather than raising prices.

“Companies have again absorbed the higher costs through a decline in their margins,” says Dr. Johannes Mayr of Eyb & Wallwitz.

This margin squeeze has two key implications for corporate credit:

• Weaker earnings profiles: Declining operating margins, especially in sectors with tight pricing power (retail, manufacturing, consumer electronics), can lead to deteriorating interest coverage ratios.
• Reduced pricing power: The inability to pass on cost increases could signal structural weaknesses in demand or market competition—red flags for ratings stability.
• Leverage vulnerability: In a low inflation environment, nominal revenue growth may remain subdued, putting pressure on companies with high fixed costs or leveraged balance sheets.

While large investment-grade firms may weather this with only outlook adjustments, high-yield issuers or margin-sensitive sectors (like retail, autos, and furniture) could face greater scrutiny or downgrades if trends persist.

Internationally, U.S. inflation and monetary policy expectations play a key role in global capital flows and funding conditions, especially for emerging markets (EMs):

• Continued dollar weakness, as suggested by Eyb & Wallwitz, may ease pressure on EM sovereigns and corporates with dollar-denominated debt. This could be ratings-supportive in the short term.
• However, if the Fed delays rate cuts despite weak inflation due to political risks or concerns about inflation expectations, global financial conditions could tighten unexpectedly—a negative for more vulnerable EM credits.

Also, low inflation in the U.S. might reinforce global disinflationary trends, especially in developed markets, complicating central banks’ efforts to normalize monetary policy or reduce stimulus—an indirect concern for credit quality in highly indebted regions like the Eurozone or Japan.

For banks, persistently low inflation implies:

• Lower interest margins: A flatter yield curve and lower long-term rate expectations compress net interest income.
• Credit quality trade-offs: While low inflation reduces default risk from cost-push inflation, weaker corporate profitability could raise credit risk over time.
• Limited earnings buffers: Banks in the U.S., Japan, and Europe already face pressure on return on equity; soft inflation could exacerbate this and increase sensitivity to credit cycle turns.

Banks with large consumer lending books or significant interest rate sensitivity (regional U.S. banks, European banks) might see rating pressure if profitability deteriorates.

The subdued U.S. inflation data, while not triggering immediate monetary or credit rating changes, point to a more complex and possibly fragile macro-financial environment. For credit ratings, the key risks are:

• Structural fiscal challenges becoming more visible for the U.S. government
• Corporate margin compression affecting credit metrics
• Global spillovers influencing emerging market debt dynamics
• Financial sector profitability under pressure from prolonged disinflation

If low inflation persists without a clear rebound in growth, credit outlooks—especially for more leveraged entities and regions—could gradually shift negative. Investors and issuers alike should prepare for rating agency narratives to pivot from inflation risk to deflationary vulnerabilities.