Sticky Inflation, Base Effects, and the Fed’s Delayed Pivot

On Tuesday, the April 25 CPI expected release will probably show moderate MoM gains in both headline and core inflation. Expections show a monthly rise 0.22 % on headline data while core CPI will possibly climb to 0.23 %, consistent with a broader cooling trend. However in May, even as MoM CPI slowed to just 0.12 %, the Cleveland Fed inflation nowcast ticked higher. YoY core CPI rose from 2.76 % to 2.83 % and core PCE from 2.61 % to 2.74 %.

Source Cleveland Federal Reserve

This May rise is not being driven by new inflationary momentum. Rather it is a textbook case of base effects. Inflation prints from the spring and summer of 2024 were unusually soft. This means even modest monthly gains in current prices mechanically lift year-over-year inflation.

Source BLS U.S

The Cleveland Fed’s model, which uses a 12mth MA and disaggregated high-frequency inputs like gasoline and shelter, does not adjust for base effects. As a result, the model reads this YoY uptick as a signal of persistent inflation pressure.

At the same time, sticky components like insurance, medical services, and shelter continue exerting upward pressure on core inflation. Food and energy disinflation has largely peaked and tariffs are beginning to feed into core goods pricing. These forces are keeping monthly core inflation stable near 0.2 to 0.3 %. However the reacceleration implied by year-over-year metrics is optical not fundamental.

Looking ahead to the next few CPI prints, the base effect remains in play. Because headline CPI fell steadily between March and July 2024 from 3.5% to 2.9% , the corresponding prints in May through July 2025 are likely to tick upward year-over-year even if monthly price gains remain modest. A return to headline inflation near 2.6 % is possible by June purely as a statistical effect. This will reinforce a temporary narrative of stickier inflation and likely delay any Fed rate cut until after the summer.

But the base effect flips again by August. Headline CPI in August and September 2024 was just 2.5 and 2.4% respectively. As those low bases drop out of the year-over-year comparison, headline CPI is likely to resume a steady decline. If oil remains near $60 /bbl and unemployment rises toward 4.5%, the disinflation trend will strengthen into the fall. That would bring headline inflation back down to 2.3 or even 2.2% by September or October.

Even with tariffs holding at 55% for China and 10% for the rest of the world, the upward pressure on core goods inflation is modest. Based on recent research by Cavallo et al, total inflation impact from the current tariff regime may add just 0.25 to 0.40 % points to core CPI by late Q3. That is not trivial, but it is insufficient to drive a reacceleration in inflation if labor markets are weakening and real wages are cooling. Insurance and shelter may remain sticky for a few more months but will likely decelerate heading into Q4 as the labor market softens and wage growth slows.

Source Cavallo Research Paper.

Market pricing in SOFR futures reflects this exact sequence. As of May 12, the June 25 SOFR contract prices in an implied rate of 4.30% , indicating little expectation of a cut. The Sept contract implies a rate near 4.07% and Dec is pricing closer to 3.74%. This implies one cut in September and another in December, totaling 50 bps by year end.

Source - TradeView

The Bianco Research tracker confirms this market view. It shows less than 10.0% probability of a cut in June, roughly 35.0% for July, and 66.0% for September. This evolution aligns perfectly with both the inflation calendar and macro momentum.

Source - Bianco Research.

The disinflation story is still intact, only temporarily obscured by base effects and sticky services. Headline inflation is expected to rise slightly into July due to the soft base from 2024. Core inflation will appear persistent but not accelerating. Starting in August, both headline and core CPI are expected to stabilize or decline. That should give the Fed the cover it needs to begin its first rate cut in September and follow through again in December, particularly if labor market slack continues to build.

While tariffs and services stickiness complicate the path, the broader forces of lower energy prices, softer goods demand, and a turning labor market are setting the stage for a return to policy easing in the second half of 2025. The Cleveland Fed nowcast may continue flashing sticky YoY prints, but beneath the surface, the mthly inflation momentum is cooling. Timing the Fed pivot is now a matter of patience and sequencing, not of inflation risk reacceleration.