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What Is Driving Slowing Inflation?

June 17, 2025

Time to Read: 3 minutes

While we expected inflation to slow, it is encouraging to see the stickier components of services and shelter inflation driving the decline.

Led by services, the disinflation trend has been notable, with prices declining from a growth rate of 3.0% from a year ago in January to 2.4% in May. At 3.9% year over year, shelter inflation is the lowest it has been since November 2021, while core services at 2.9% is the lowest in more than four years.

However, could tariff-related price hikes and the recent increase in oil prices due to tensions in the Middle East hamper the downward path of inflation? We believe the impact of tariffs will amount to a one-time price adjustment as opposed to a long-term trend. Despite the roughly $17 increase in the price of oil since early May to $74 a barrel, it is only up 0.4% from a year ago. If there are no significant supply disruptions or if tensions de-escalate, the additional impact to energy prices or overall inflation should be limited. While the disinflation trend may slow from here, we maintain our year-end inflation forecast of 2.5-3.5%.

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Positive Signals from Capex?

The One Big Beautiful Bill Act’s provision regarding the full expensing of capital expenditures is already having an impact on companies’ investment plans. We believe this a positive signal for economic growth.

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Cuts Are Coming

Last Friday, Federal Reserve Chair Jerome Powell described a shift in the balance of employment and inflation risks, and the market rallied on the news. For us, nothing has changed. We have been closely monitoring the labor market and indicators of inflation, and we continue to expect two rate cuts this year.

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Higher Margins Drive Robust Earnings

Second quarter earnings season is winding down. Nearly all companies have reported, and the majority beat expectations as margin estimates continue to rise.

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Earnings Season Wrapping Up on a High Note

Second quarter earnings season is winding down, but earnings are up, and better than expected. Despite some potentially concerning signals from the real economy, including muted job gains, and possible seasonal volatility, we remain constructive on equities. A positive second quarter earnings season strengthens our conviction.

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