Cautious optimism. That might be the theme of the day on Wednesday, as Wall Street ticked higher on the back of cooler-than-expected inflation data and signs of progress on U.S.-China trade talks. Stocks were off the highs of the morning as of roughly 12:45 p.m. ET. These updates are certainly welcome for the market. However, they are far from an all-clear sign to pile into equities, especially with the S & P 500 now up more than 21% since its April 8 closing low and trading around 22 times forward earnings, well above its long-term average. The inflation data released Wednesday encapsulates why cautious optimism, at the moment, is an appropriate attitude. At the headline level, the May consumer price index rose 0.1% month over month, when economists polled by Dow Jones expected a 0.2% rise. The annual inflation rate came in at 2.4%, matching the Dow Jones estimate. Core CPI, which strips out food and energy due to their inherent price volatility, was up 0.1% month over month and 2.8% on an annual basis — below estimates of 0.3% and 2.9%, respectively. As investors closely monitor the economic impacts of President Donald Trump’s tariffs, receiving a mostly softer-than-expected CPI report is good news. So, why not take it as a universal positive? For starters, the shelter index component of the CPI was up 0.3% on a monthly basis in May, unchanged versus the prior month. As a result, shelter costs are up 3.9% versus the year-ago period. That’s a bit of a deceleration from the 4% year-over-year advance in April’s report. While the rate of increase may trending lower, prices are nonetheless going up. That means affordability continues to be a major issue for what constitutes roughly one-third of the CPI. As Jim Cramer put it during the Morning Meeting on Wednesday, “It was shelter that was a sticking point.” The U.S. economy has thus far kept chugging along despite the housing affordability issue. Still, it’s foolish to think there is no limit to the amount consumers are willing — or are even able to pay — for shelter. It is among the top priorities, of course, but the ever-rising cost may force pullbacks elsewhere, especially if incomes aren’t keeping up with the pace of housing cost increases. While less spending elsewhere may indeed help reduce the rate of inflation — thanks to less demand for those other goods — it is going to pressure the economy overall because two-thirds of U.S. gross domestic product is dependent on private consumption. Recall, we already saw a negative GDP print in the first quarter of this year (granted that was largely because of a surge in imports to get ahead of Trump’s tariffs). Lower interest rates — something that Trump is, not surprisingly, calling for following Wednesday’s CPI release — may help the housing market in a few ways but they won’t be enough on their own. For starters, lower rates serve to make monthly payments more affordable. They would also allow “stuck” homeowners — people who have considered moving but don’t want to give up the ultra-low mortgage rates they got locked into during the pandemic — to list their homes, adding supply to the market. Lower rates could also help new construction projects get off the ground and completed more affordably. Ultimately, more demand sparked by lower rates — without an adequate increase in supply — would likely only serve to push shelter costs even higher. In the end what we need is more supply, and we need it now. The other reason to take this CPI report with a grain of salt is the ongoing trade negotiations. While the U.S. and China appear to have reached the framework of an agreement on important issues such as rare earth mineral access, the tariff rate on goods imported from China is still at 55% . The rate of inflation may be lower, but with higher tariffs still on the blocks, we’ve likely not yet seen the full impact on consumer behavior. For the stock market, specifically, there are some valid counter arguments to be had. Among them: We just wrapped up a positive first-quarter earnings season, with 78% of companies outpacing earnings expectations and 64% exceeding estimates for revenue, according to FactSet data. Additionally, as we wrote last week, so long as unemployment remains low, the consumer is likely to keep spending. Add this all up, and there are reasons to be — you might have guessed it — cautiously optimistic. That’s especially true if a more concrete agreement with China is indeed finalized this week. The bottom line is we continue to see opportunities in the market and maintain the luxury of long-term thinking with our investments. But we must also stay conscious of the risks to economic growth posed by the continued climb in shelter costs, the remaining uncertainty posed by trade negotiations and other geopolitical conflicts in the world. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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