Inflation Is Back, and It's Quietly Redistributing Your Money

The first time inflation surged in 2021, it looked like a headache that would go away. Loose fiscal policy, supply chains, a one-time reopening pop — most assumed the Federal Reserve would knock it back down to 2% and everyone would move on. Then the headaches kept coming, and now, more than four years later, the same optimism is doing a reprise. The market has largely concluded that the Fed won its battle. The data says that conclusion may be premature.

In May, the consumer price index rose 4.2 percent from a year earlier — the largest 12-month jump since April 2023, and up from 3.8 percent the month before. One caveat: core inflation, which strips out food and energy, was a more moderate 2.9 percent. Energy was the biggest single driver — up 23.5 percent from a year earlier — but food and core prices also rose, so it was not the only thing carrying the headline number.

A skeptic could argue that a jump in gasoline prices is not "inflation" in any lasting sense. That reading deserves respect — and it is exactly the wrong lesson to take from this moment. Because this isn't 2021's demand pop. This wave is being fed by three forces at once, none of which is guaranteed to fade on its own.

Three forces, one direction

The first is the energy shock itself. An escalation in the Middle East war, and the threat to shipping lanes around the Strait of Hormuz, has pushed oil back above $100 a barrel. Energy is the world's most important price; when it rises, it doesn't just show up at the pump. It shows up in the cost of moving every good, every meal, every mile.

The second is tariffs. This is the one that tends to get underestimated, because importers absorbed the initial cost rather than passing it through. That patience runs out. Economists at the Peterson Institute project the delayed pass-through of tariffs to consumer prices will add roughly half a percentage point to headline inflation, and they are skeptical it will wash out of the numbers quickly.

The third is simply that the US economy is running hot. The ISM manufacturing index surged to 55.6 in July — the strongest factory expansion since May 2022 — with new orders and production accelerating. Strong demand and elevated factory prices together are the classic setup for pressure that starts in raw materials and works its way up the cost structure. Add in household inflation expectations that have started drifting upward again, and you have an engine that is trying to run well above the 2% speed limit.

And what is the Fed doing? Sitting still. The federal funds rate has been parked at 3.5% to 3.75% since last year. Roughly seven in ten economists in a September Reuters poll expect the Fed to hold through the rest of 2026, and the committee was sharply divided at its July meeting, with three members voting for an increase. Here is the uncomfortable arithmetic: the Fed's preferred inflation gauge, PCE, has run above the 2% target for more than five years, and economists see it landing at 3.5% this year and 2.4% in 2027 — still above target, not reaching 2% before 2028.

I want to be careful about what I'm claiming. This is a thesis, not a fact. If the shipping lanes reopen and oil settles back down, some of this pressure — perhaps most of it — could recede. But the pattern the market keeps betting on — that inflation is a stubborn 2021 leftover that the Fed has tamed — is not what the last year of data shows.

What running hot means for your money

Here is where this stops being an economics lecture and becomes something you can act on. Inflation above target is not neutral. It is one of the most powerful redistributors of real value in finance, and it quietly redraws the lines between winners and losers.

Think about it as a transfer between three groups. First, creditors and long-duration assets — bonds, and any investment whose value sits far in the future. When prices rise 4% a year and a bond pays a fixed 4%, you are treading water in nominal terms and losing ground in real terms. That is why, as inflation expectations climb, the 10-year Treasury has been trading near 5% — the market is demanding compensation for the erosion.

Second, price-takers — businesses that cannot raise prices without losing customers. For them, inflation arrives as a cost it cannot pass along, squeezing margins and quietly shrinking capital. These are usually discretionary or highly competitive products, where the customer always has a cheaper alternative.

Third, and most important for income investors, are the price-setters — the businesses that provision the real economy with something essential, and that can raise prices through a cycle without destroying demand. Energy, food, logistics, infrastructure, defense, utilities. These companies do not merely survive inflation; in many cases the shock that drives the headline number is a tailwind for their cash flows. Their dividends are real money that defends your purchasing power, and — critically — they can grow.

That is the entire game in a running-hot world. The person who owns long bonds and a static paycheck watches real value evaporate. The person who owns price-setting companies with growing payouts sees the opposite.

The income test that matters

But here is the trap, and it is a big one. Inflation breeds a gold rush toward anything with a high yield, and that instinct will cost people money. The headline yield tells you how much a company pays; it tells you nothing about whether it can keep paying, or grow, through this cycle. Into that void walks a stream of "too good to be true" names that are exactly that.

The useful mental model is the equity yield curve: the relationship between yield and growth. In an inflationary regime, a modest yield with strong, funded growth beats a fat static yield every time — because a dividend that grows keeps up with inflation while a flat one slowly turns to dust. The screening question for any candidate is not "what does it pay?" It is two sterner ones: Can this company raise prices without losing customers? And is the payout funded by free cash flow, with a balance sheet that can survive a downcycle?

Take a real-economy example to make it concrete. ExxonMobil, the integrated oil giant, is about as direct a beneficiary of an energy-led shock as exists — the commodity it sells is the thing driving the headline number. Its dividend yields about 2.5% — modest, not eye-catching. But it has raised that dividend for 23 consecutive years, and it funds the payout comfortably: roughly $30 billion in trailing free cash flow against a payout ratio near 70%, on a balance sheet with low leverage. This is the profile the inflation regime rewards: pricing power, FCF-funded growth, and the durability to wait out a cycle. It is not a yield shortcut, and at roughly 20 times trailing earnings it is not cheap — but it is the kind of company whose dividends do real work for you when prices run hot.

The contrast is instructive. Two companies can carry the same 4% sticker yield. One is a price-setter with funded, growing payouts and a clean balance sheet. The other is a price-taker with a payout it scrapes together and no room to grow when its costs rise. Under a normal 2% regime, they might march together for years. Under a 3.5%-and-holding regime, they diverge completely — one compounds your income, the other quietly erodes your capital.

The risk you have to hold in your head

None of this is a reason to load up indiscriminately, and I would not want the pivot to pricing power to become its own crowd-following trade. The biggest risk to this thesis is the one most people aren't pricing: the same energy shock that lifts inflation can, if it goes far enough, crush the demand underneath it. If the Strait of Hormuz stays shut and energy squeezes household budgets hard, J.P. Morgan warns the result could be a negative growth shock — high inflation plus rising unemployment, which is ultimately disinflationary for different reasons. In that world, "cyclical strength" becomes the wrong bet.

So the honest summary runs like this: I believe inflation is likely to remain more persistent than the market wants to admit, but that does not make every asset with a high yield attractive, or every energy stock a buy at any price. The winners still need pricing power, balance-sheet strength, and a payout that can survive a full cycle — and they need to be bought with an eye on valuation, not just on the yield the shock is currently generating.

For an ordinary investor, the actionable turn is simpler than it sounds. Cash loses real value; fixed-rate bonds lose purchasing power; price-taking stocks pass their problems on to you. The defense is owning the companies that can raise their prices and grow their payouts through exactly this kind of regime — the real-economy price-setters funded by free cash flow — and holding enough of them with the conviction to stay put. Inflation redistributes value either way. The only question is which side of the transfer you are standing on.