Inflation after one year under Trump: Prices continue to rise, but some key items are cheaper

Year‑over‑year U.S. inflation eased modestly from 3.0% in January 2025 to 2.7% in December 2025, leaving overall inflation roughly steady and still above the Fed’s 2% target. Sector detail shows electricity prices up nearly 7% year‑over‑year, housing, medical care and tuition/child care up ~3%, groceries and clothing up ~2%, and durable goods rising under 1%; gasoline has fallen nationally from about $3.10 to below $2.80 since November. Wages have broadly grown faster than inflation, though wage gains lag for lower‑skill and less‑educated workers, while consumer sentiment has dropped for five straight months and is near record lows. The data complicate political claims of having “defeated” inflation and suggest a mixed macro backdrop that may keep markets attentive but unlikely to trigger dramatic re-pricing absent further shifts.

Analysis

Market structure: Sticky but slightly lower headline inflation (2.7% YoY vs 3.0% a year ago) reallocates economic winners toward sectors that benefit from stable but >2% inflation: consumer staples (WMT, KO), selective utilities/renewables (NEE), and residential landlords (EQR) that can re-price rents near 3% annually. Losers include margin-sensitive discretionary retailers and refiners if gasoline and refined-product deflation persists; electricity +7% YoY points to input-cost stress for energy‑intensive industrials and upside for grid capex suppliers.

Risk assessment: Short-term (days–weeks) risk centers on CPI prints/FOMC language that can reprice real yields; a single upside surprise >0.3pp would push 2s–10s yields wider and hit duration trades. Tail risks include an oil shock or tariff shock (low probability) that could re-accelerate inflation >4% within 6 months or a wage-price spiral in lower-skill segments; monitor Atlanta Fed wage series and 3‑month rolling CPI change as catalysts.

Trade implications: Favor real‑asset inflation protection (short-dated TIPS) and relative value across consumer staples vs discretionary; prefer airlines and travel names on sustained gasoline < $2.90/gal and short refiners if crack spreads compress. Use short-dated options around CPI/FOMC to hedge 1–3 month gamma risk and keep duration neutral until Fed signals path to <2.5% core.

Contrarian angles: Consensus treats 2.7% as “benign” and underprices services stickiness (housing, medical ~+3%) that keep rates higher for longer. If consumer sentiment collapses further, growth-driven disinflation could force a rapid downshift in yields — a crowded short-duration or underweight long-duration position would then be mispriced. Grid investment responses to electricity inflation are an underappreciated long-term structural theme.

Key Decisions for Investors

• Establish a 1.5–2.5% portfolio position in TIPS via iShares TIPS ETF (TIP) with a plan to add another 1% if two consecutive CPI prints show headline or core >3.0% YoY; horizon 3–12 months as insurance against upside inflation/fed repricing.
• Open a 1.5–2% long position in United Airlines (UAL) or Southwest (LUV) to capture fuel tailwinds if national gasoline remains < $2.90/gal for 30 days; set a 3–6 month horizon and trim on any sustained oil rally above $85/bbl.
• Implement a pair trade: long 2% Walmart (WMT) and short 1.25–1.5% Macy's (M) to exploit income-tier consumer divergence over 6–12 months, adding to the long if same‑store sales at WMT beat comp by >150bp quarterly.
• Enter a hedged short on refiners via a 3‑month put spread on Valero (VLO) sized to ~1–1.5% portfolio risk (buy 15% OTM puts, sell 7.5% OTM) if national gasoline/jet margins compress month-over-month; unwind if 10‑yr yield drops >50bp (signals growth shock reducing fuel demand).