The Inflation Scare’s Backbone Is Giving Way

• CPI growth hit 4.2% in May

• Prices at the gas pump are down 7% in June.

• The shift means the worst of the inflation scare may be behind us.

If you want to know where inflation is heading, start with the gas station marquee…

At the start of this week, I laid out my outlook for the pace of headline consumer price index (“CPI”) growth. I argued that when the U.S. Bureau of Labor Statistics (“BLS”) released its May data, the overall number would accelerate. But, the rate of acceleration would cool relative to the prior couple of months, when the Middle East conflict first flared.

That call was grounded in an inflation‑tracking gauge I’ve built using regional Federal Reserve bank manufacturing and services business survey data. My work showed “prices received” easing in May versus April. The BLS data backed that up, with month‑over‑month CPI growth slipping from 0.9% to 0.6%. That moderation helped the stock market arrest its recent slide…

More importantly, Wall Street is already looking past the latest print. Money managers are focused on what’s happening at the gas pump. According to the Energy Information Administration (“EIA”), the average price per gallon so far in June has dropped to $4.30 from $4.61 in May. That’s a 7% slide in the single largest driver of the recent inflation rebound.

That dynamic may be about to deepen. Yesterday, the White House said Iran’s Supreme Leader Mojtaba Khamenei had signed off on a peace deal to end the current standoff in the Persian Gulf. Completion is expected in the next few days. Iran did not deny the talks but noted no final agreement had been reached. If a deal is ultimately struck, additional oil supply exiting the Strait of Hormuz would weigh on prices. That, in turn, would cool inflation, strengthen the case for Federal Reserve rate cuts, and support a steadier rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

The first place to start is prices at the pump. Gasoline is a daily use item for most households. Filling up our cars is what lets us get to work, take the kids to school, and shop for groceries.

The EIA publishes an excellent weekly data set tracking the average price per gallon across all grades:

• The average price so far in June is $4.30.

• That compares to $4.61 in April.

• That’s a 7% month-over-month decline.

In the chart above, I’ve plotted month‑over‑month changes in gas prices against the 2010–2025 monthly average. Historically, January through June tends to see price increases. During March, April, and May, when inflation growth surged, you can see price changes at the pump running well above the seasonal norm.

So far in June, the opposite is true. As noted, prices are down 7%, versus an average increase of 0.4%.

Now let’s translate that into the non‑seasonally adjusted pace of annualized inflation growth the Fed watches. Below is the recent monthly profile:

In the table, I’ve highlighted the cooler months in green and the hotter months in red. From that, you can see:

• March through May accounts for 2.5% of the current 4.2% growth.

• The typical pace of growth prior to March was 0.2%.

• Falling gas prices could mean flat to declining monthly growth.

This shift in gas prices is critical for thinking about monetary policy. It suggests we may have seen the worst of the inflation fallout from the Middle East conflict in May. From here, the inflation path should cool.

Next, let’s connect this to interest rates by looking at the real rate of interest. The real rate subtracts annualized CPI growth from the effective federal funds rate. A positive number tells the Fed policy is restraining inflation; a negative number suggests it is still fueling it. In May:

• The effective fed funds rate was 3.6%.

• CPI growth was 4.2%.

• That means the real rate of interest was -0.6%.

The above chart details the real rate of interest since 2000. Since that time it has averaged -0.6%. In other words, that’s a level our central bank has tolerated before taking action. As of May, we’re right back at that threshold.

So, what does that imply?

Based on the data we’ve just walked through, real rates have reached the Fed’s comfort band, but have not yet broken below it. That argues for policymakers remaining on hold for now. At the same time, forward‑looking gas prices are rolling over. If that trend persists, CPI growth should slow and potentially contract, reinforcing the case for staying put.

At the end of the day, if oil flows through the Strait of Hormuz are headed higher, global oil prices are headed lower. That shift should push real rates back into positive territory. It may take until early next year to fully retrace to pre‑conflict levels, but that trajectory tells the Fed its rate‑cut cushion is rebuilding. That, in turn, should bolster Wall Street’s confidence in the economic support backdrop and underpin a steady rally in the S&P 500.

Five Stories Moving the Market:

Adobe said its Chief Financial Officer Dan Durn would depart next week, leaving the company without a top tier of veteran leadership after Chief Executive Officer Shantanu Narayen announced in March that he would step aside – Bloomberg. (Why you should care – the departure will increase skepticism about whether generative AI is hurting the company’s business)

Lennar forecast third-quarter home deliveries below Wall Street estimates amid a persistently weak U.S. housing ​market; Single-family ‌homebuilders like Lennar have been grappling with slowing sales as weak consumer confidence, job uncertainty and high mortgage rates weigh on ​demand – Reuters. (Why you should care – buyer incentives are starting to erode profit margins)

U.S. President Donald Trump pulled back from his threats to launch more military strikes and seize Iran’s oil infrastructure, insisting the White House was nearing a deal on peace talks with Tehran; Trump said Iranian Supreme Leader Mojtaba Khamenei had signed off on the plan, which he said would be completed in coming days – WSJ. (Why you should care – the agreement is expected to open a 60-day window for discussions on Iran’s nuclear program)

Oil flows through the Strait of Hormuz have surged by about 50% this month, according to Vortexa, underscoring what’s at stake as the US and Iran vie for control of the critical waterway; Vortexa estimates that at least 1.8 million barrels a day of non-Iranian Persian Gulf oil left the waterway in the first 10 days of June, up from 1.2 million a day in May – Bloomberg. (Why you should care – rising energy supplies coming out of the Persian Gulf should help to weigh on global energy prices and inflation growth)

The European Central Bank raised interest rates for the first time in almost three years, leading the charge among central banks in the developed world in tackling inflation driven by the war in Iran – WSJ. (Why you should care – the European Central Bank cut sooner and more often than the Federal Reserve, likely having gone too far)

Economic Calendar:

Japan – Industrial Production for April (12:30 a.m.)

U.K. – GDP for April (2 a.m.)

U.K. – Exports, Imports for April (2 a.m.)

BoE Inflation Expectations (4:30 a.m.)

Germany – Bundesbank Monthly Report (5 a.m.)

U.S. – University of Michigan Consumer Sentiment (Preliminary) for June (10 a.m.)

ECB’s Nagel (Germany) Speaks (10:30 a.m.)

U.S. - Baker Hughes Rig Count (1 p.m.)

U.S. - CFTC’s Commitment of Traders Report (3:30 p.m.)

Fed Releases Balance Sheet Updates on Commercial Banks (4:15 p.m.)