How to Invest When Inflation Refuses to Chill

Inflation’s Stubborn Comeback

Consumer prices rose 2.9% in August compared with a year earlier, the fastest pace since January. Core inflation, which strips out food and energy, came in at 3.1%. Tariffs are clearly filtering through, though not in one sudden wave. Cars and clothes are getting more expensive, while items like furniture and tires cooled slightly.

Groceries stand out. Coffee prices jumped 21% over the past year, beef steaks 17%, and apples 10%. Anyone who has tried to shop for dinner knows it already. Tariffs combined with supply constraints are pushing those essentials higher. Companies from Walmart to Smucker’s are already passing along costs, and executives have warned more increases are coming.

For you, this is why pricing power matters. Retailers and consumer staples companies that can raise prices without scaring off shoppers will continue to find support. Those without that flexibility will face a squeeze as margins shrink and volumes soften.

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Jobs Are Softening, and That Is Not Just Noise

Initial unemployment claims rose to the highest level since 2021. Payroll growth has slowed throughout the summer, and the unemployment rate is drifting higher. Layoffs are not yet surging, but the slow-to-hire and slow-to-fire equilibrium of the past two years is starting to crack.

The Fed is paying close attention. Softer jobs data gives policymakers room to justify cuts, but there is a catch. If wage growth stalls while prices creep higher, households get squeezed from both sides. That combination typically slows discretionary spending. Consumers may cut back on dining out, travel, and upgrades, while sticking with essentials and value purchases.

This is why you should expect more pressure on companies that rely on “treat yourself” vibes. At the same time, firms with business models built around nonnegotiable spending, like utilities or repairs, will hold up better.

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The Fed’s Tightrope Act

Markets are convinced the Fed will cut rates in September and probably again in the months that follow. Powell has suggested that weaker jobs give them breathing room, but inflation data still makes the decision tricky. One cut helps ease borrowing costs, yet it does not erase tariff-driven price increases or instantly boost wage growth.

Think of the Fed as turning down the volume, not changing the song. Rate cuts will help mortgages, loans, and credit card balances, but they will not make your grocery bill cheaper. 

For you, the key is to anticipate where that incremental easing will actually show up in earnings and multiples. Housing-related names, select financials, and rate-sensitive cyclicals may get a boost. Import-heavy sectors without pricing power could still struggle.

Strategy: Position Before the Cut

This is the moment to tilt, not to wait. Inflation and jobs are giving mixed signals, but the direction for rates is clearer. The market has already priced in some optimism, yet there is still room to get ahead of the curve.

Here is how to think about it:

• Stick with pricing power. Own companies that can raise prices without losing customers. Retailers with strong private labels, staples, and must-have services all fit.

• Lean into rate-sensitive cyclicals. Lower borrowing costs benefit housing suppliers, construction names, and select financials.

• Protect the downside. Essentials like utilities and waste services hold steady if households keep tightening budgets.

• Mind the consumer barbell. Higher earners are still spending while middle-income households are tapped out. That creates opportunity at both the high end and the deep value end, but less in the middle.

Be selective on tech and industrials. Companies with global exposure and heavy import costs will continue to face tariff friction. Focus on firms with resilient supply chains and proven pricing flexibility.

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Inflation in Your Shopping Cart

One way to think about the current environment is to picture your grocery cart. You might skip the fancy steak, but you are still buying detergent and coffee. Consumers are already making those trade-offs. The same goes for you. You want exposure to the items people cannot cut, not the extras they skip when paychecks feel lighter.

That is why services like waste collection, connectivity, and auto repair are higher up in the budget waterfall. People may cancel a streaming subscription or delay a new phone purchase, but they cannot skip their internet bill or let the trash pile up.

The Consumer Barbell in Action

Households at the top of the income ladder are still doing relatively well. Their wages rose last year even after inflation, and they have more capacity to keep spending. Households in the middle and lower tiers are seeing flat real incomes, which means they are hunting for value. 

That dynamic creates opportunity for both premium and discount strategies, but less for companies stuck in the middle.

Think luxury brands with loyal buyers who do not flinch at higher prices, or discount retailers that offer smaller pack sizes and sharp promotions. Both ends can win. The problem is for mid-range companies that lack either exclusivity or scale.

Top Takeaways

• Inflation is firming, especially in everyday essentials.

• The labor market is softening, which gives the Fed more reason to cut rates.

• Rate cuts will ease financial conditions but will not erase tariff-driven costs.

• You should prepare for a barbell consumer landscape where high-income and value shoppers hold up while the middle weakens.

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