Inflation Is Back to Normal

False fear morphs are hallmarks of bull markets—which, after all, climb walls of worry. With tariffs siphoning attention from inflation, there is a new worry dominating. But as inflation shows, once markets get the measure of a story, even when it is fundamentally bad, they can quickly look through it and move on. Let us run through some recent inflation data to show you how and why.

Eurostat released eurozone inflation data Tuesday showing the bloc’s harmonized index of consumer prices (HICP) easing to 1.9% y/y in May. (Exhibit 1) The return to sub-2% inflation—below the ECB’s target—while notable, isn’t new. HICP hit 1.7% y/y last September. The blip upward from there, though, caused many to fret—and fight the last war, worrying renewed price pressures would sink stocks anew.

Exhibit 1: Eurozone Inflation Rates Back to Historical Norms

Source: FactSet, as of 6/5/2025.

But as you can see, while post-traumatic inflation stress can embed itself in people’s mindsets, it doesn’t dictate the future. The past isn’t prologue. Successful investing, in our view, requires looking forward—like markets do—and seeing how reality is likely to differ from the crowd’s expectations, which are often unduly shaped by prior events.

Back in the USA, the Bureau of Economic Analysis reported the Fed’s targeted measure of inflation last Friday. The headline personal consumption expenditures (PCE) price index dynamically weights its components based on consumers’ monthly purchases—versus CPI’s fixed weights—better accounting for households’ actual inflation experience.

Exhibit 2 shows the latest April headline reading at 2.1% y/y, back at last September’s rate. Like the eurozone, this seemingly spells relief.^[i] After the PCE price index’s brief blip higher, it is within spitting distance of the Fed’s (squishier) 2% average inflation target. In our view, it doesn’t matter that the rate is a tenth of a percentage point above that mark. Simply, inflation data aren’t that precise and there is no evidence, from anywhere globally, that central banks can fine tune economic data to that degree.

Exhibit 2: US Inflation’s Return to Normal in the Rearview, Too

Source: FactSet, as of 6/5/2025.

Still, inflation remains a thorny issue on the minds of many American and European investors and pundits. Consider the University of Michigan’s split on party lines over inflation viewpoints. As Exhibit 3 shows, inflation expectations for Democrats and Republicans flipped after November’s elections. The latest read through April: 5.1% for Democrats and for Republicans, switch the digits to 1.5%.

Exhibit 3: Americans’ Expected Annual Inflation Rate Over the Next Five Years by Party Affiliation

Source: University of Michigan Surveys of Consumers, as of 6/5/2025.

Tariffs are likely a key dividing point. They could raise some prices, but inflation is about prices economywide. Those are unlikely to spiral higher anew without a spike in money supply. And that isn’t happening in the US or Europe. US M4—America’s broadest measure of money supply—rose 4.0% y/y in April, a rate that prevailed prepandemic and a far cry from June 2020’s 30.4%. For the eurozone, the ECB’s April M3 (its broadest measure) rose 3.9% y/y—also historically low.

Exhibit 4: US and Eurozone Money Supply Isn’t Spurring Inflation

Source: Center for Financial Stability and ECB, as of 6/5/2025.

Markets almost always move on from issues well before people do—it is why investors face risks from fighting the last war. So it is with inflation now. Look, 2022’s bear market wasn’t all about inflation. But it was one factor among many. And one factor markets moved on from nearly three years ago. If you still fear hot or sticky inflation, it is time to turn the page. The fundamental backdrop has very much moved on. Investors who haven’t yet risk falling out of step.