The disinflationary story of 2025 was going well. Prices were falling, central banks softening, and the path back to the Fed’s 2% inflation target looked less like a forecast and more like an actual plan. People were starting to believe it—which, in retrospect, was the tell.
Then the situation in the Strait of Hormuz happened.
This disruption has pushed oil prices sharply higher and reintroduced a supply-driven inflation impulse into a system that spent most of last year getting rid of one. Partial ceasefire efforts have done little to normalize flows. As of early June, energy markets remain volatile, prices remain high, and the disinflationary trend that characterized much of 2025 has stalled.
Central banks have historically called this scenario "transitory" and looked through energy shocks—the logic being that supply-driven price increases aren't something interest rates can fix.
The problem is that energy prices don't stay where they started. They move through supply chains and tend to drive broader price pressures, including second-round effects. Which is a more technical way of saying the price increases that started at the gas pump tend to show up everywhere else eventually.
For the Fed, the current setup is uncomfortable. Growth is resilient and inflation is reaccelerating—the two conditions that make it hardest to justify the rate cuts markets were expecting. Policymakers are now reassessing how much they can cut and when. The answer, increasingly, looks like less than expected and later than hoped.
For investors, this environment points toward businesses with real pricing power—companies whose customers keep buying even when prices go up—while long-duration assets remain vulnerable to rate volatility and shifting inflation expectations.
The path back to the Fed's 2% inflation target isn't closed; it's just longer and narrower than it looked six months ago, somewhere between "holding" and "we'll see."
Before your clients call you
This is a good moment for a few targeted conversations—not to alarm anyone, but to get ahead of questions that are likely already forming.
On inflation and purchasing power. If your clients haven't brought up gas prices, they will. When it comes up, use honest framing: the disruption is real, the inflation impulse looks likely to linger longer than earlier forecasts suggested, and the path back to target is less certain than it was six months ago. You don't need a prediction; just show you're paying attention.
On bonds and duration. If a client holds meaningful long-duration fixed income, this is a good moment to revisit that conversation. Higher inflation expectations hurt long-term bond prices. Better to know where the exposure sits now than to explain it later.
On equity positioning. Companies with real pricing power—those whose customers keep buying even when prices go up—tend to hold up better in supply-driven inflation environments. If your clients are in diversified equity strategies, look at whether a quality tilt is already doing some of this work. If it is, get ahead of it; that's a conversation to have before they ask.
The conversation to start now. A simple "how are you feeling about everything going on" tends to reveal more than a formal review does. Clients who are anxious will tell you, and clients who aren't will remember that you asked. Either way, you've made contact before the next headline gives them a reason to call you first.
How to explain this to a client
- Oil prices are up because of the conflict in the Middle East and inflation is ticking back up as a result.
- The Fed was getting ready to cut interest rates this year, but this situation makes that harder. Expect fewer rate cuts later than planned.
- Rates staying higher for longer affect bonds. Some are more sensitive to rate changes than others. We've looked at where your exposure sits and we're watching it.
- The economy is actually holding up well—growth is solid and companies are profitable. The complication is inflation creeping back up because of what's happening overseas with oil. The Fed can't cut rates the way markets expected, but this is exactly the kind of thing we plan for.