On Inflation, Look Past Today’s Headlines

If you will, come with us in our DeLorean in a time travel fever dream to July 14, 2026, the day June’s US Consumer Price Index (CPI) inflation report hit. Open any financial website not named MarketMinder, and you will see a headline warning you inflation’s slowdown was temporary because oil prices were back up, renewing the likelihood of high energy prices bleeding into other goods and services. In other words, don’t get comfy, hot inflation is coming back. Yet fast forward to today, and that is not what happened. CPI slowed again in July, from 3.5% y/y to 3.4%, with energy prices cooling and core measures tame—all proving that fixating on short-term data is fruitless for investors.^[i]

Think through the ramifications of taking all the short-term inflation chatter at face value. A month ago, the popular narrative held that with inflation likely to resurge, the Fed would need to hike rates to keep it in check. Futures markets put a high probability on it. When Fed head Kevin Warsh didn’t hike at late July’s meeting, headlines warned he risked slipping behind the 8-ball. The three regional Fed bank presidents who voted to hike rates at that meeting got heaps of attention. Warsh got pilloried for not saying under what conditions he would actually hike, and long bond yields ticked up—allegedly a sign markets had responded to a wishy-washy Fed by signaling hotter inflation expectations. Yet now, suddenly, to most of these same outlets, a -0.1 percentage point reduction in the headline inflation rate gives Warsh and the Fed breathing room. A lingering few still note energy could drive a resurgence—but most seem past that.

Any one of those scare stories could have been a trigger point to sell stocks. 2022’s shallow bear market has folks convinced hot inflation and rate hikes are inherently destructive for markets, given the downturn coincided with both. We take a different view, seeing that bear market as a byproduct of negative sentiment, which stretched beyond inflation and the Fed to the war in Ukraine, lingering lockdown-born supply-chain issues, feared gas shortages in Europe, the economic blowback from sanctions and much more. Note, too, a new bull market began that October, while the Fed was still hiking aggressively. But the meme of inflation and the Fed being market killers stuck, and investors have fought the last war ever since.

Actually doing so would have proven foolish, though. The S&P 500 is up since both the Fed meeting and June’s inflation report hit, defying the doom mongering. It flirts with all-time highs as we write.

We doubt this is because July inflation proved better than everyone feared a month ago. Markets aren’t so fickle. They look about 3 – 30 months out. Everything shorter than that is generally pre-priced. Anything beyond is typically too distant to assign probabilities to. So we think markets looked to that 3 – 30 month window and discerned (among other things) that whatever inflation does as energy prices swing month to month, longer-term trends aren’t likely to be problematic. We think this was an easy determination to make if you cut out the noise and viewed the trends, like core goods prices (which exclude food and energy) mostly flatlining all year—suggesting higher energy costs aren’t bleeding elsewhere as feared. Market-based inflation expectations, which are based on the difference between nominal Treasury yields and Treasury Inflation Protected Securities (TIPS) yields, were also tame. Yield curves remained steep, creating room for the Fed to hike rates without choking lending and growth.

This is why we counsel patience and a long-term focus. The inflation and interest rate landscapes didn’t suddenly improve with one inflation report today. They were already fine! And stocks saw it, even if headlines didn’t. Think like markets do, looking past the headlines, and we think you will be ahead of the game.