Beneath the Headlines: Why Autos and Travel Offer Resilient Opportunities in a Moderating Inflation Environment

The U.S. economy is navigating a curious paradox: core inflation remains subdued, yet shelter costs continue to anchor price growth. This dynamic has created a fertile landscape for investors to uncover undervalued sectors in consumer discretionary, particularly in autos and travel, where price declines signal competitive strength rather than weakness. With tariffs and supply chain challenges lingering, companies that demonstrate pricing power or exposure to pent-up demand are poised to thrive. Here's how to navigate this terrain.

The Core CPI Conundrum: Shelter vs. Discretionary

The latest data reveals a split in inflation drivers. Core CPI (excluding food and energy) rose just 0.1% in May, with the annual rate holding at 2.8%. Shelter costs, up 3.9% annually, remain the dominant force, while sectors like airline fares and used vehicles have seen sustained declines. This divergence suggests a low-inflation equilibrium is taking hold, with sticky shelter costs not spilling over into broader price pressures.

For investors, this stability opens opportunities in industries where price declines reflect industry-specific resilience rather than economic fragility. Let's break down two key sectors:

1. Autos: A Mixed Bag, but Value Lurks in the Details

The used car market is a case study in segmentation. While the Manheim Used Vehicle Value Index (MUVVI) rose 6.3% year-over-year in June, non-adjusted prices dipped 1.1% monthly due to tariff-driven volatility. Crucially, not all segments are equal:
- Luxury vehicles and EVs underperformed, with annual declines of 12.9% and 17.5%, respectively.
- Traditional SUVs, compact cars, and midsize sedans fared better, though still down 14–17% annually.

This divergence hints at a correction in overvalued segments, particularly EVs, which face supply gluts and shifting consumer preferences. Meanwhile, retail used-car sales grew 9% year-over-year in April, suggesting demand remains robust. Investors should favor companies with diversified portfolios, such as Carvana or AutoNation, which can capitalize on pent-up demand for affordable vehicles.

2. Travel: Airfares Lead the Charge Downward

Airline fares have been a standout deflationary force, falling 2.7% in May and extending a streak of monthly declines. This reflects intense competition and overcapacity in the sector. Yet, falling prices can drive volume growth, creating a sweet spot for airlines with operational efficiency.

Companies like Delta Air Lines and Southwest Airlines, which have managed costs and maintained strong unit revenue, could benefit as lower fares attract price-sensitive travelers. The travel recovery—still nascent in some regions—is further buoyed by resilient consumer balance sheets, with households spending freely on discretionary items like vacations.

The Inflation Outlook: Why This Environment Will Persist

The shelter component will likely keep core CPI elevated, but it's not the harbinger of runaway inflation many fear. Rent growth is cooling, and new apartment supply is easing price pressures. Meanwhile, the Fed's pause on rate hikes and stable energy prices (gasoline fell 12% annually) reinforce the low-inflation narrative.

This backdrop favors sectors where companies can pass through costs without sacrificing volume, or where price declines signal a return to rational pricing. Autos and travel fit both criteria.

Investment Playbook: Targeting Resilience and Recovery

1. Auto Manufacturers with Diversified Portfolios:

2. Ford and General Motors, which balance EVs with traditional vehicles, offer exposure to both segments. Their scale allows cost absorption, while used-car demand supports residual values.

3. Airlines with Strong Unit Revenue:

4. Alaska Airlines and JetBlue have demonstrated pricing discipline. Their focus on regional routes and ancillary revenue could insulate margins amid fare declines.

5. Travel Infrastructure Plays:

6. Expedia and Marriott International benefit from rising travel demand. Marriott's flexible booking policies and Expedia's tech-driven pricing tools position them to capture post-pandemic recovery.

7. Avoid Overcorrected EVs:

8. While Tesla's stock has faced headwinds, avoid pure-play EV manufacturers until supply-demand imbalances stabilize.

Final Take: Inflation's Silver Lining

The moderation in core CPI, despite tariffs and shelter pressures, is no accident—it's a testament to market discipline in sectors like autos and travel. Investors who focus on companies with operational agility and demand resilience can turn this environment into a profit engine. As long as shelter costs stay contained and energy prices stabilize, this low-inflation sweet spot will favor the undervalued over the overhyped.

Data as of June 2025. Always conduct due diligence before making investment decisions.