It's official! U.S. consumer prices stopped rising last month. The CPI number was unchanged between April and May. Inflation is over! If only.  

Now, the bond market did react like this was a big development, and understandably so. It wasn't just that the headline was flat. The core was also up just two-tenths of a point, which was less than expected. The year-on-year rates are still over 3% for both, but if we continue to get monthly readings like these, inflation will be back towards "normal" quickly. Markets are now pricing in two rate cuts by year-end.  

But as we know, consumers aren't feeling much relief yet. Confidence and sentiment readings have been lower than "usual" when the job market is this strong. The obvious reason seems to be the cumulative toll inflation has taken over the past four years since the pandemic hit. No one feels good paying $9.19 for a McDonald's 10-count chicken nugget meal, even if they're earning a bit more than they used to.  

On top of that, the biggest inflation lately has come from unavoidable expenses like health care and insurance--"needs" areas, as Piper Sandler calls them. Sure enough, as of April, Piper's "non-discretionary" CPI basket was up 6.2% year-on-year. Ouch! Meanwhile, their discretionary basket was up just 0.3%.  

In other words, "needs" inflation is "acting like a tax, crowding out discretionary spending, and pulling down inflation elsewhere," says Piper economist Jake Oubina. And you can see this crowding-out pattern playing out in corporate earnings. As Pepsi put it, "The lower income consumer in the U.S. is stretched...choosing what to buy, where to buy." Tyson Foods also noted "a more cautious, price-sensitive consumer."  

The trouble is that "needs" inflation may stay elevated for awhile. Health care--we know the myriad issues with that. Insurance rates are also expected to keep rising. Shelter inflation is still running hot, up 0.4 points again last month, and the high cost of renting single-family homes is expected to keep upward pressure there for some time. 

Unfortunately, as Oubina points out, the Fed is looking at these same areas (which it calls "super-core" inflation) to cool down before dramatically lowering rates. In other words, the Fed could be running policy too tight, trying to cool down inflation in "needs" areas that are either idiosyncratic or still seeing lagged upward pressure from the pandemic.  

As a result, parts of the economy may slip into deflation long before inflation is tamped out in those sticky areas. Sure enough, prices online have been falling for almost two years now, according to Adobe's Digital Price Index. In May, the index was down 5% from a year earlier, with apparel prices down 11%, electronics down nearly 8%, and appliances and furniture down 5% each.  

And the longer this "needs" versus "wants" inflation persists, the bigger the gaps we're going to see between the haves and have-nots in both consumer and corporate America.  

See you at 1 p.m! 

Kelly 

Click HERE to sign up for this newsletter in one easy step. 

To hear this as a podcast, subscribe to "The Exchange" and pick "From the desk of..." 

Twitter: @KellyCNBC

Instagram: @realkellyevans