Why Inflation Will Come Down

The official narrative from today's Federal Reserve meeting is one of cautious inaction. Chairman Jerome Powell tells us the economy is strong, but the looming uncertainty of tariffs forces the Fed to remain vigilant, holding interest rates in restrictive territory.

He says the committee must be "forward-looking" and that forecasters expect "a meaningful amount of inflation to arrive in the coming months" from these tariffs. A backward glance at the data might suggest a more neutral policy, but the Fed is choosing to stare down a hypothetical threat.

But this fixation on tariffs is a large miscalculation.

While the Fed debates the uncertain impact of import duties, it is actively ignoring the most powerful and predictable force currently shaping inflation: shelter.

The data here is not uncertain. It is clear, present, and moving with rapid downward velocity. A look at the components of inflation makes the importance of housing impossible to ignore.

The large pink area, representing housing, has been the primary driver keeping headline inflation elevated.

In May 2025, housing contributed 1.8 percentage points to the 2.4% overall inflation rate. As the rate of change in housing costs decelerates, its contribution to the headline number shrinks, pulling the entire inflation rate down with it.

While the Fed waits and watches for tariff effects, the housing market itself is undergoing a fundamental shift. Major real estate brokerage Redfin now forecasts that the median U.S. home-sale price will actually fall 1% year over year by the fourth quarter of 2025.

This marks a significant reversal. After years of rising prices, the market is turning because there are now more sellers than buyers.

Consider the hard data from the market:

Total housing inventory has surged 16.7% year over year to its highest level in five years. At the same time, sales of existing homes fell to a six-month low in April. It has become a buyer's market, where negotiators can successfully drive prices down. This is the tangible reality that the Fed's inflation models should be centered on.

Falling home prices today directly translate into falling shelter inflation in the CPI reports of tomorrow. This disinflationary wave is not a guess, it's a near certainty, and the trend is already clear in the official data.

The above chart of Owners' Equivalent Rent, which makes up a substantial portion of Core CPI, shows a dramatic rollover from its peak. This trend is accelerating downward, confirming that the leading indicators of home prices are now passing through into the inflation calculation.

Given this clear, powerful, and predictable disinflationary force, the argument for holding interest rates at restrictive levels dissolves. The data does not support inaction. To continue a restrictive policy when the primary driver of inflation is in a rapid, structural decline is unnecessary.

Yet the Fed’s own projections show a committee digging in its heels for a prolonged period of tight policy. The Fed’s median projection for the federal funds rate is 3.6% at the end of next year and 3.4% at the end of 2027. The divergence between this stance and the reality of the data is stark.

There is a disconnect among committee members, but the median path they project is clear. When viewed against recent history, the severity of this projected policy becomes undeniable.

A policy is considered restrictive when the Fed Funds Rate is higher than the rate of inflation, and the committee is signaling a commitment to a period of restriction that is historically long and deep.

This chart contextualizes the current policy against the last 25 years of data. The period where the Fed Funds Rate (blue line) is above CPI Inflation (orange line) is defined as restrictive.

The Fed's current projections, if realized, would create a period of restriction that is exceptionally long and deep compared to recent history shown on the chart.

The Fed's fixation on tariffs is leading it toward a major policy error.

The committee is signaling a commitment to a restrictive path that is completely detached from the primary driver of inflation. The data is sending a clear signal, and that signal is that the time to cut rates is now.

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