The May CPI report is out, and the headline number looks alarming: 4.2% year-over-year, the highest in three years. But the figure that actually matters is core CPI inflation — and that tells a different story.
The key figure isn’t the headline. It’s core CPI* — the version that strips out food and energy — which came in at 2.9%. That’s just below the 3% threshold that many investors were watching. Month-over-month, core rose only 0.2%, below the expected 0.3%. Even tariff-sensitive categories like appliances and furniture ticked slightly lower.
So what pushed the headline so high? Energy. Gasoline was up 40.5% year-over-year. Airfare climbed 26.7%. Together, energy-linked categories accounted for more than 60% of the monthly increase. That’s not a broad inflation problem spreading through the economy — that’s a war premium built into oil prices.
This distinction matters. If inflation were moving from tariffs into wages and services, the Federal Reserve would face a much harder choice. But when pressure is concentrated in energy, the inflation story follows the oil story. And the oil story follows the Middle East.
Right now, with partial hostilities ongoing and two major shipping chokepoints* under pressure, energy prices have a floor. But that floor is geopolitical, not structural. If a deal gets done or tensions ease, the headline CPI number could fall on its own without the Fed doing anything.
Markets still sold off after the release — partly from uncertainty around the new Fed chair’s first meeting on June 17th, partly because $93 oil is still $93 oil. But the worst-case scenario, core CPI breaking 3% and forcing aggressive rate hikes, was avoided.
My take: This report didn’t solve anything, but it confirmed that the inflation problem is mostly wearing an oil mask. Watch the Middle East, not the Fed, for the next inflation signal.
*Core CPI: A measure of inflation that excludes food and energy prices to show underlying price trends. *Chokepoints: Narrow geographic passages — like the Strait of Hormuz and the Red Sea — through which large volumes of global oil trade move.
Disclaimer: This is not investment advice.