Investors Are (Still) Fighting the Last War on Inflation

Is war-related inflation set to crush Americans’ purchasing power? Some pundits suggest so, citing government data earlier this month showing real (inflation-adjusted) wages falling -0.1% m/m in May—their third consecutive monthly decline.^[i] Higher gas, headlines said, ate all Americans’ raises over the last year … and then some. Now, we don’t deny higher gas prices pinch. But this strikes us as a case of investors fighting the last war—in this case, the hot inflation that contributed to 2022’s shallow bear market—and not a harbinger of weakening consumption.

Bear markets’ psychological effects often linger long after they end, and fighting the last war is a prime example. When thing X causes or is associated with a bear market, investors spend much of the next bull market hunting for a repeat—if they can identify the trigger early this time, they can avoid the pain. For instance, in mid- to late-2020, pundits warned swine flu and even the bubonic plague had “pandemic potential,” suggesting more market-walloping lockdowns loomed. Then mpox, hantavirus and, more recently, Ebola outbreaks all took turns in the spotlight.

Or go back to the 2010s, when everyone feared a rerun of 2007 – 2009’s global financial crisis. In 2009, Dubai’s debt crisis was supposedly the next shoe to drop. In 2010, municipal debt sparked fears after a then high-profile 60 Minutes report (which proved laughably wrong). Then came the eurozone debt crisis, which put bank balance sheets back under the microscope as everyone feared a destructive doom loop between banks and sovereigns. These fears still hadn’t dissolved by 2016, when problems at Germany’s largest bank drew comparisons to Lehman Brothers, a victim of 2008’s collapse. So did bank collapses in Portugal and Italy (not to mention US regional banks and Credit Suisse in 2023). Throughout the 2010s, subprime auto loans and student debt took turns as alleged financial crises in waiting. None came true.

Fighting the last war rarely helps. The next bear market almost always has a different cause, partly because expectations for a repeat get priced in. That renders fighting the last war a false fear, enabling investors to use its prevalence to gauge sentiment. When folks fight the last war, the inherent skepticism helps balance hotter sentiment in some corners, as with AI and Tech today.

People have been re-fighting the inflation war since this bull market began in October 2022, making today’s jitters over falling real wages merely the latest iteration. Consumers’ inflation expectations are one indication. Exhibit 1 helps show this, charting one measure of consumers’ expected inflation rate over the next year since May 2016.

Exhibit 1: Inflation Expectations Are Re-Heating

Source: The Conference Board, as of 6/30/2026.

Note how expectations haven’t returned to the relative calm pre-COVID. They have consistently overshot prepandemic norms even after 2022’s hot inflation cooled. Expectations spiked in 2025, as President Trump’s Liberation Day blanket and reciprocal tariffs sparked fear—which proved false. Old ghost stories are getting recycled.

This concept is also readily apparent in headlines. In late 2023, droughts’ lowering water levels in the Panama canal sparked fears of global supply chain disruptions reheating inflation, rerunning one of 2022’s inflation contributors.^[ii] Just a couple of months later, Houthi militant attacks on western-marked ships in the Red Sea rekindled similar shipping-related inflation fears.^[iii] More generally, fear of “sticky prices” lingered throughout 2023 and 2024—services and shelter allegedly proved the inflation war wasn’t won. Society forgot shelter simply lags other price trends as rent hikes arrive at lease renewal. Some suggested rising commodity prices in early 2024 risked reheating inflation.^[iv] Other examples include port strikes across America’s east coast.

Falling real wages are merely a twist on these fears, allegedly signs higher prices are starting to bite. But household purchasing power isn’t really swirling the drain. First and foremost, oil and gasoline prices have already cooled significantly. As we write, Brent crude sits around $73 per barrel, just 2.6% above pre-war prices.^[v] The national average price per gallon of regular unleaded gas sits around $3.85, down from $4.35 in mid-May.^[vi] Not a full round trip, but some relief with more likely to come if oil stays lower. Since energy prices drove inflation’s uptick since March, this should foster cooler monthly readings ahead. Oh, and money supply growth—inflation’s main fuel—is still at benign, prepandemic norms. Companies lack broad pricing power.

As for fears of eroding purchasing power, don’t be so hasty. Yes, the Bureau of Labor Statistics’ real average hourly earnings measure fell in May. But the Bureau of Economic Analysis’s Personal Consumption Expenditures report showed real disposable personal income (DPI, personal income less personal current taxes) up 0.3% m/m in May.^[vii] Either way, monthly fluctuations up and down are normal amid an expansion, not auto-negative for consumption.

When markets are volatile as they have been this month, headlines tend to emphasize bad news over good. We think there is a lot of that here. But keep in mind that is a side effect of volatility and a sign sentiment isn’t just AI froth. The bull market’s wall of worry still has some bricks.