Inflation - half empty or half full?
Investors may want to remain flexible as uncertainty continues
Published: AUG 17, 2026
While headline vs core inflation, where “core” strips out the volatile energy and food components is well known, another related but not identical distinction lies between flexible and sticky inflation. These two are tracked by the Federal Reserve (Fed) banks of Atlanta and St. Louis respectively. The Sticky-Price Consumer Price Index (CPI) refers to goods and services whose prices don’t change for at least 4.3 months. The pricing of rent, health care, and insurance is “sticky.” Flexible Price CPI measures the universe of goods and services whose prices move faster than that in response to inflation. Examples include food and energy but also clothing, airfare, and hotel bills.
As anyone who’s filled their tank to just half or to full can attest, flexible inflation is readily apparent right now. So far, Fed Chair Warsh has shown patience with rates, and he’s been given some data releases to endorse his posture. Annual inflation moderated from 3.5% to 3.4% in July after a weak employment report. The Fed has until mid-September before it makes its next move. If sticky prices continue to advance while flexible prices remain above the overall target rate, Chair Warsh’s deliberate pace could get harder to maintain.
With the direction of inflation still a concern, the Fed still paused and rate policy still uncertain, investors may prefer a neutral approach.
Our outlook:
If inflation moderates from here, we may continue into a soft landing and the Fed may see an opportunity to ease. Realistically, this may require a positive finalization of negotiations with Iran, since gas prices figure heavily in the spike upwards in flexible inflation this year. The fear is that inflation will persist longer into a stagflation-lite scenario.
An expeditious resolution to the Iran war is a binary and somewhat unpredictable question. We think it makes sense to remain nimble: disciplined equity exposure and a fixed income allocation tilted towards the front end of the curve are two approaches that may fit the current environment.
- Sticky soft landing — Inflation moderates gradually, growth slows but stays positive, and the labor market cools but remains healthy. Portfolio considerations: Diversified equities are attractive, with a tilt toward large-cap quality and international names potentially benefiting from stable global growth; small caps have less support without a stronger growth catalyst. In fixed income, short-duration strategies (roughly 1–3 years) allow a nimble stance without betting on rate-cut timing, and investment-grade credit is appealing over high yield given moderate growth and contained spreads. Emerging market debt may perform reasonably well if the dollar stays range-bound.
- Inflation persistence (Stagflation lite) — Growth weakens while inflation remains sticky from energy, wages, tariffs, and geopolitics. Portfolio considerations: Historically large-cap, quality stocks with pricing power hold up best against margin pressure, value tends to outperform growth, and small caps look vulnerable to tightening conditions. Ultra-short and floating-rate fixed income will likely reprice if the Fed hikes, offering a hedge, while we prefer investment-grade credit over high yield for its stronger balance sheets. Emerging market debt is likely to lag, as sticky inflation and a firmer dollar work against it.
Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. In addition, fixed-income investors should be aware of other risks such as credit risk, inflation risk, call risk and liquidity risk.
High-yield, lower-rated securities generally entail greater market, credit/default and liquidity risks and may be more volatile than investment-grade securities.
Foreign investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.
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The performance quoted is for illustrative purposes only and is not representative of any specific investment.
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