Inflation, Oil, and a Market That’s Repricing Reality
For much of the early part of the year, the story seemed straightforward. Inflation was coming down, the Federal Reserve was nearing the end of its tightening cycle, and markets were beginning to look ahead to rate cuts. That combination helped support equities and framed expectations across the board. The data is still moving in that direction, but the path is proving to be less clean than expected.
The S&P 500 is up 7% year-to-date. That number, however, does not tell the full story. Markets pulled back meaningfully from late January through March before recovering into quarter-end. It is a reminder that even in a positive year, the experience of getting there is rarely smooth.
At the same time, the broader economic backdrop remains relatively stable. The labor market continues to hold up well, with unemployment in the 3.8% to 3.9% range and wage growth running around 4% year over year. That level of strength continues to support consumer spending, but it also keeps pressure on inflation, particularly within services.
Interest rates reflect that balance. The Fed Funds Rate remains at 5.25% to 5.50%, while the 10-year Treasury has been holding in the mid-4% range. Mortgage rates, still near 7%, continue to weigh on affordability, even as limited housing supply has prevented meaningful price declines. The system is adjusting, but it is doing so gradually. Which brings us to inflation. Most of the attention continues to be placed on CPI, which has shown steady improvement. Headline CPI is now running in the low 3% range, with core inflation not far behind. On the surface, that supports the view that the Fed is making progress toward its 2% target.
But that is only part of the story.
CPI vs PCE
The Federal Reserve does not target CPI. It focuses on PCE, or Personal Consumption Expenditures, and the distinction between the two matters more than it has in quite some time. While CPI and PCE generally move in the same direction, they are constructed differently in ways that can meaningfully impact the reading of inflation. CPI is based on a fixed basket and places heavier weight on housing, while PCE is broader, adjusts more frequently, and reflects changes in consumer behavior.
For years, PCE consistently ran below CPI, reinforcing confidence that inflation was moving in the right direction. Recently, that relationship has shifted. PCE has been coming in roughly in line with, and at times slightly above, CPI. It is not dramatic, but it is meaningful because it suggests inflation, as measured by the Fed’s preferred gauge, is more persistent than headlines imply. Housing has begun to moderate, pulling CPI lower, while services and healthcare remain firm and more heavily represented in PCE. In addition, PCE captures how consumers adjust spending, which can keep inflation elevated in certain environments.
In short, CPI is showing progress. PCE is showing stickiness. And since the Fed is targeting PCE, that distinction matters. It also helps explain why expectations for rate cuts have been pushed out. The direction has not changed, but the timing has. Layer on top of that a renewed focus on energy, and the picture becomes more complicated.
Oil Is Back in the Conversation
As our friends at 46 Peaks Investment Advisory recently noted, there is a simple way to think about oil, captured well by Tommy Norris, a character played by Billy Bob Thornton on Landman:
“You want oil to live above $60 but below $90. When gas gets up over $3.50 a gallon, it starts to pinch. If it is $100, every product in America has to readjust its price. $78 a barrel, that is about perfect.”
Oil has recently pushed above $100 per barrel. At higher levels, energy costs do not stay contained. They move through transportation, production, and ultimately into the price of goods and services across the economy. That creates a challenge at a time when inflation had been moving in the right direction. Higher oil prices have the potential to slow the disinflation process and keep pressure on the very areas the Fed is watching most closely within PCE. It does not reverse the broader trend on its own, but it does complicate the timeline.
Earlier this year, markets were pricing in a more aggressive rate cutting cycle, but those expectations have already been pushed out as the data has come in. The path to lower rates is still intact, but it is likely to take longer than many initially expected. As it turns out, getting inflation from 9% down to 3% was the easy part. The last mile is usually where things get more complicated. Unfortunately, much like watching the Philadelphia Phillies string together a few good innings, let alone a few good games, progress lately has been a bit uneven.
Portfolio Positioning
Within portfolios, core fixed income is starting to do what it is supposed to do again. Exposure to the U.S. Aggregate Bond market, represented by AGG, has produced modest positive returns this year while generating yields in the 4% to 5% range. That income component is meaningful again, and during periods of equity volatility, it has provided stability within portfolios.
These are the types of environments where diversification shows its value. Leadership shifts, correlations change, and the areas that lagged for years can begin to contribute again. Staying positioned across asset classes remains the more reliable approach than trying to predict when those shifts will occur.
At the same time, international equities have been one of the more consistent contributors recently. Developed international exposure, represented by IEFA, outperformed U.S. equities in 2025 and has continued that trend this year, up about 9% year-to-date compared to 7% for the S&P 500.
What is more interesting is the longer-term context. For most of the past decade, U.S. equities significantly outperformed international markets, driven largely by multiple expansion and large-cap technology. That gap left international markets trading at a meaningful discount. What we are seeing now is at least a partial reversal of that trend.
I’d like to share two charts that help explain how leadership between U.S. and international equities actually works over time, and why we continue to maintain exposure to both.
How International Performs in Different Market Environments
This first chart highlights something that often gets overlooked. When U.S. equity returns are weak or modest, international equities have historically outperformed at a much higher rate. In periods where U.S. returns were flat to mid-single digits, international markets outperformed roughly three out of every four times.
That is not a coincidence. It reflects differences in valuation, sector composition, and economic cycles across regions.
When U.S. markets are strong, they tend to dominate. But when returns normalize or volatility increases, leadership broadens. That is typically when international exposure begins to matter most.
From a portfolio standpoint, this is not about predicting when that shift happens. It is about being positioned for it ahead of time.
Leadership Rotates — and It Can Last a Long Time
This second chart reinforces a broader point: leadership between U.S. and international equities moves in cycles, and those cycles can persist longer than expected. The most recent period of U.S. outperformance has lasted over a decade. That is not unusual historically, but it does tend to create imbalances over time, particularly in valuations. It also shows the relationship with the U.S. dollar. Periods of dollar strength have generally aligned with U.S. outperformance, while periods of dollar weakness have supported international returns.
That relationship is not perfect, but it has been directionally consistent enough to matter. The takeaway is simple. What has worked best over the last decade is not guaranteed to lead over the next one. These shifts do not happen gradually. When they occur, they tend to happen faster than expected.
Periods like this tend to raise the same question: should anything be done differently right now? It is a fair question, but often the wrong one. The speed and magnitude of both pullbacks and recoveries are a reminder of how difficult and risky it can be to time markets, particularly when uncertainty is elevated. When your portfolio is aligned with your risk tolerance, time horizon, and overall financial plan, then periods like this, while uncomfortable, should not require meaningful changes. These environments tend to reward discipline far more than reaction.
For Further Reading
A new senior tax deduction is available now—here’s what actually matters
Vericrest Private Wealth
https://vericrestprivatewealth.com/a-new-senior-tax-deduction-is-available-now-heres-what-actually-matters/
Somehow, new college grads are optimistic amid a brutal job market
Fast Company
https://www.fastcompany.com/91533206/somehow-new-college-grads-are-optimistic-amid-a-brutal-job-market-report-shows
Women investors are staying the course through market volatility
CNBC
https://www.cnbc.com/2026/04/28/women-investors-market-volatility.html
