Today’s Consumer Price Index (CPI) report delivered exactly what the market was hoping for: a modest 0.2% month-over-month rise in headline inflation, firmly in line with expectations and down from earlier elevated prints. Coupled with the drastically revised jobs report earlier this month, showing weaker employment growth than initially reported, the data leaves the Federal Reserve with little room for debate. Unless there is a dramatic and unexpected reversal, the Fed will be cutting rates in September, October, and December (with no meeting scheduled for November).
This pivot is not just about today’s CPI number–it is about the composition of that number, the credibility of the data, and the Fed’s dual mandate of price stability and maximum employment.
The CPI’s Weak Link: Shelter Inflation
While most investors track headline CPI and core CPI (which excludes food and energy), few appreciate just how much one category, shelter, dominates the index. Shelter inflation accounts for over 30% of the CPI basket, making it the single most important driver of reported inflation.
The problem? The way shelter costs are measured by the Bureau of Labor Statistics (BLS) is both lagged and flawed. The primary input, “Owners’ Equivalent Rent” (OER), is derived from surveys asking homeowners how much they think they could rent their home for–not from actual market transactions. This method results in a metric that moves very slowly and reflects housing market trends with a 6–12 month delay.
For much of the past year, shelter inflation has been running hot, 0.3% to 0.4% per month, equivalent to an annualized rate of roughly 5%. But this month’s reading slowed to 0.2%. That may not sound dramatic, but given shelter’s weight in CPI, even a 0.1–0.2 percentage point shift here can shave significant percentage points off the total monthly CPI reading. And because shelter inflation changes glacially, a downshift now sets the stage for several months of lower headline inflation.
The Fed’s Data Dilemma
The Fed has been navigating policy in an environment where its most watched inflation metric is distorted by stale shelter data. Policymakers have long acknowledged this lag, with several Fed officials noting that real-time market-based rent indicators (such as those from Zillow and Apartment List) have been showing disinflation for months. Today’s CPI print suggests the official data is finally starting to catch up.
On the labor side, the recent BLS jobs report revisions were eye-opening. The initial headline numbers painted a picture of robust job growth, but the downward revisions revealed a softer labor market, exactly the type of cooling the Fed wants to see when attempting to tame inflation without triggering a recession. Combined with subdued wage growth and an uptick in unemployment, this undermines the “overheating economy” narrative that hawks have leaned on.
Why Tariff Fears May Be Overstated
Skeptics have warned that recently imposed tariffs could reignite inflation. While tariffs do tend to lift prices for certain goods, their impact on overall CPI is far smaller than the shelter effect and can be offset by declines in other categories. Moreover, tariffs do not typically feed into shelter inflation, which is where the real CPI battle is fought.
In parallel, productivity trends are quietly counteracting some inflationary pressures. The AI-driven productivity boom is enabling firms, particularly in technology, to do more with fewer employees, reducing labor cost pressures and allowing companies to expand output without proportionally expanding payrolls.
Market Implications: A Perfect Backdrop for Equities
For equity investors, this combination of stable-to-declining inflation, moderating labor market conditions, and AI-driven profit expansion is about as favorable as it gets. Corporate margins, particularly in tech, are expanding at a pace not seen in years. Many of the largest firms are achieving record revenues, and mid-cap growth companies are experiencing accelerated operating leverage.
Historically, Fed easing cycles that begin without a deep recession tend to produce powerful equity rallies. With rate cuts likely in September, October, and December, the second half of 2025 could mirror past “soft-landing” scenarios, where policy easing meets healthy earnings growth.
We anticipate a strong year-end rally, led by tech and AI beneficiaries, but also extending into select consumer discretionary and industrial names that can harness productivity gains. While volatility will likely spike around each Fed decision and key data release, the underlying trajectory remains bullish into 2026.
The Bottom Line
The Fed’s mandate is clear, and so is its path forward. Inflation is easing in the most important category, shelter, while the labor market is cooling in a way that supports, rather than threatens, economic growth. Data lags mean this trend is unlikely to reverse quickly.
For markets, that means an extended runway for rate cuts to support valuations and liquidity. And for investors willing to embrace the productivity-driven transformation underway, the opportunity could be substantial.
Rate cuts are coming, not because the Fed wants to, but because the data leaves them no choice.
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Disclosure: Past performance is no guarantee of future results. Please refer to the following link for additional disclosures: https://lnkd.in/e29X6rN
Additional Disclosure Note: The author has an affiliation with ERShares and the XOVR ETF. The intent of this article is to provide objective information; however, readers should be aware that the author may have a financial interest in the subject matter discussed. As with all equity investments, investors should carefully evaluate all options with a qualified investment professional before making any investment decision. Private equity investments, such as those held in XOVR, may carry additional risks—including limited liquidity—compared to traditional publicly traded securities. It is important to consider these factors and consult a trained professional when assessing suitability and risk tolerance.