Core inflation excludes food and energy, but that doesn’t mean their effects stay contained. Diesel is a good example. It powers freight, agriculture and industry, and constrained refining output can push its price up faster than crude alone would suggest.
Consider a trucking company hit with a sharp rise in fuel costs. It can absorb the increase, raise freight rates or cut spending elsewhere. Absorbing costs squeezes profits, higher rates eventually reach consumers, and cutbacks can mean delayed expansion or fewer hires.
Multiply that across thousands of businesses and an energy shock becomes a broader problem: simultaneous higher inflation and weaker growth. That’s the stagflation scenario the Federal Reserve dreads, since persistent inflation argues for tighter policy while a softening labor market argues for the opposite.
None of this is inevitable. Fuel prices may retreat, or businesses and customers may push back. The question is which pressures persist and how widely they spread.
What The Economic Data Means For Advisors
Right now, the picture is steadier than the mood. Growth has held up despite elevated energy costs, and, according to the Department of Labor, jobless claims remain low, which suggests businesses aren’t broadly cutting workers. But hiring has slowed, and soft payroll growth deserves attention.
For advisors, the most useful takeaway is that solid growth and employment can coexist with real household strain. Food and energy may be excluded from core inflation, but they’re unavoidable parts of a client’s budget. Higher fuel and grocery bills can squeeze purchasing power and force spending tradeoffs even when GDP grows and unemployment stays low.
A client who feels pinched isn’t misreading the data. They’re feeling costs that core inflation sets aside and that GDP and jobs figures don’t reflect. Use the data to decide which conversations to start, not to talk clients out of what they feel.
Use the data to decide which conversations to start, not to talk clients out of what they feel.
To judge whether pressure is spreading, track a handful of indicators together rather than reacting to any one report. Business input prices and freight costs show whether higher energy costs are working their way through the economy. New orders and hiring show whether companies are starting to pull back. Jobless claims can provide an early indication that slower hiring is giving way to broader labor‑market weakness.
If several indicators move in the same direction at once, advisors have an opportunity to discuss what the changing economic conditions might mean for their clients. The question isn’t whether to change the portfolio, but whether the developments have changed the assumptions underlying the client’s existing plan.
Finally, keep in mind that no single indicator tells the whole story, and markets often respond well before weakness shows up in the data. Treat these readings as prompts for client conversations about spending needs and risk capacity, not as trading signals.
Why This Matters For Portfolios
Clients may wonder why markets can rise while their living costs keep increasing, or why their portfolios fall when economic reports still look reasonably healthy. Markets respond to expectations about earnings, inflation and interest rates, not simply to today’s economic readings or consumer sentiment.
The source of an economic slowdown matters, too. In an inflation‑driven slowdown, stocks may face pressure from weaker earnings while bonds struggle with persistent inflation and higher yields. Both can decline together, challenging the diversification investors expect. In a recession accompanied by falling inflation and interest rates, high‑quality bonds may instead provide a more effective counterbalance to equity losses.
A plan that only works if the soft landing holds, or only works if it doesn’t, is a forecast dressed up as a strategy. Portfolios need a disciplined framework for navigating more than one possible outcome, with a clear understanding of the tradeoffs involved.
A plan that only works if the soft landing holds, or only works if it doesn’t, is a forecast dressed up as a strategy.
What Advisors Can Do Now
Clients experience the economy through their household finances, not an economic report. An advisor’s first task is to understand whether rising costs have materially changed a client’s financial circumstances, their comfort with investment risk or both.
Acknowledge what clients are experiencing. Strong GDP or employment numbers don’t make higher grocery, insurance or energy bills less real. Recognize those pressures without treating household frustration as proof that a recession is imminent.
Focus on capacity for drawdown, not just appetite for upside. Higher living expenses may reduce liquidity and the ability to withstand investment losses. That is different from feeling more nervous about markets, and it may call for a genuine review of spending needs and portfolio risk.
Don’t let headlines dictate portfolio decisions. Neither reassuring economic data nor alarming inflation stories should drive decisions on their own. Reducing exposure after a decline isn’t inherently a mistake; abandoning an agreed process because of fear is often the greater risk.
Establish a process for managing uncertainty. Before volatility arrives, discuss what different investments and risk‑management approaches are designed to do, including the possibility of missing upside during recoveries. Clients should know when a change in circumstances warrants revisiting the plan and when discipline means following it.
Clients should know when a change in circumstances warrants revisiting the plan and when discipline means following it.
The Bottom Line
Diesel illustrates how an economic shock can affect inflation, growth and household finances in different ways. For advisors, the challenge is understanding not just what the economic data is telling us, but what clients are actually experiencing. The goal isn’t to eliminate uncertainty or predict every market turn. It’s to distinguish when changing circumstances require a change in strategy and when the better decision is to follow the process established before emotion took over.
Emily Damman is President and John Osier is Vice President, Investment Strategy, at Beacon Capital Management.
