Inflation report day rolled around again yesterday — that monthly ritual where Wall Street analysts clutch their spreadsheets and Fed officials pretend not to be checking the markets on their phones under the conference table.
We all thought April's cooler-than-expected Consumer Price Index had us cruising toward normal monetary policy. Then May's numbers dropped like an unexpected plot twist in what we thought was a predictable economic story.
The headline number? A flat 0.0% month-over-month. Zero. Nada. Zilch. That's well below the 0.1% economists were betting on. Core inflation (which I've always thought should be called "inflation minus the stuff you actually notice in your daily life") came in at 0.2%, exactly as expected.
Markets did their usual dance — bonds up, stocks climbing, traders suddenly penciling in rate cuts a bit earlier than before. Everyone loves good inflation news when it doesn't bring economic carnage along with it.
But wait a minute. Where exactly did inflation go? What happened in May?
The obvious culprit is energy, which fell 3.6% during the month. Oil prices have been sliding downward lately, and that filtered through to consumers in a pretty straightforward way. But there's more to unpack here.
Housing costs — that unmovable mountain that's been blocking the Fed's view of the promised land — showed signs of finally behaving. Shelter inflation rose 0.4%, which isn't great, but at least it's not accelerating. This matters enormously because housing represents roughly a third of the entire CPI basket. It's the elephant in the economic room.
I've been tracking the relationship between market rents and official shelter inflation since the pandemic began, and let me tell you, it's like watching paint dry on a glacier. The lag times are ridiculous. Today's CPI shelter numbers reflect rental agreements signed months ago, which themselves were influenced by housing market conditions from even earlier. It's economic archaeology, not current events.
But direction matters more than speed here, and that direction seems to be turning the right way.
Look, one month doesn't make a trend. The Fed knows this better than anyone. Remember when they were telling us inflation was "transitory" back in 2021? That aged about as well as milk left on a summer dashboard.
Still, this fits a pattern. The bumpy road of disinflation continues, but the general direction remains downward. Over the past year, the Fed's preferred inflation gauge (core PCE) has fallen from around 5% to about 2.8%. Not perfect, but progress.
So what does this mean for interest rates?
The Fed has made it clear — painfully clear, if you've watched any of Powell's press conferences — that they want to see "more good data" before cutting rates. Translation: they need sustained evidence, not just one surprisingly good month.
(And honestly, having covered Fed policy for years, their institutional trauma from the 1970s inflation spiral makes them naturally overcautious. They'd rather keep rates too high for too long than cut too soon and have to reverse course.)
The timing gets tricky. There's that little event in November... what's it called again? Oh right, a presidential election. The Fed guards its political independence like a dragon hoards gold, which means they either need to move before election season heats up or wait until December.
Market pricing now suggests about 45 basis points of cuts by year-end — roughly one or two quarter-point reductions. September is emerging as the betting favorite for the first move.
The mystery of May's missing inflation tells us something important: the disinflationary process remains intact, even if it's messy and non-linear. For the Fed, it's another data point suggesting their restrictive policy is working, but not enough to trigger an immediate reaction.
For the rest of us? The "higher for longer, but not forever" interest rate story continues. The waiting game drags on — but at least we're seeing genuine progress.
And in an economy that's delivered plenty of negative surprises over the past few years, I'll happily take a positive one, even if it leaves economists scratching their heads.