Headline news continues to center on the steady rise in prices and the cost of living. The primary measure of inflation is the Consumer Price Index (CPI). From September 2016 to September 2020, the CPI rose about 1.9% a year. Over the following two years, prices for nearly all goods and services climbed, and annual CPI inflation reached a 40-year high of 9.1% in June 2022.
Shrinking supplies combined with multi-trillion-dollar government stimulus programs drove up prices, as consumers and businesses with stronger balance sheets were willing to pay more.
Fiscal stimulus, enhanced benefits, and low borrowing costs supported household balance sheets during the pandemic. Many households also spent less on commuting and parking, and financed purchases from TVs to automobiles at loan rates near 0%. Household finances improved dramatically after 2020 as savings soared to record highs, and many households used those savings to pay down debt and locked in 30-year fixed-rate mortgages below 4%.
These conditions were highly unusual, and many households and businesses benefited from the trillions of dollars in federal support.
More than 11.8 million Paycheck Protection Program (PPP) loans were issued to small businesses as the government distributed more than $800B, and the loans could be forgiven if the money was used mainly for payroll. Households had multiple sources of government support, from enhanced unemployment benefits to food subsidies and tax credits.
This period of low borrowing costs ended almost as quickly as it began. In 2022 the Federal Reserve (Fed) began aggressively raising rates to fight inflation, ending an era of near 0% interest rates. Mortgage rates jumped from under 3% to over 7%, which priced out many qualified buyers and, in our view, has weighed on the housing market since.
Even though many of these government programs have ended, the momentum of rising prices has continued for different reasons. Higher interest rates increase the cost of doing business, which prompts many businesses to pass these costs on through higher prices. Tariff policy has also added uncertainty and potential cost pressure for businesses. The Supreme Court struck down the broadest of the 2025 tariffs in February 2026, but tariffs on steel, aluminum, copper, and other goods remain, and new trade investigations are underway.
The latest challenge for consumers and businesses is soaring oil, gasoline, diesel, and other energy costs, as the Middle East conflict involving Iran has disrupted oil and refined-product markets. At the national average price for all grades of gasoline, filling a 20-gallon tank cost about $92.20 the week of September 21, up roughly 73% from $53.30 in early January 2020.
The recent surge in gas prices at the pump echoes the energy crises of the 1970s. In 1968, the average price of leaded regular gas at the pump (with full service) was $0.337 per gallon, according to the U.S. Energy Information Administration (EIA). After the 1973 Arab oil embargo and the 1979 Iranian Revolution, it nearly quadrupled to a peak annual average of $1.311 in 1981. Prices eased afterward but never returned to pre-embargo levels, and they did not top the 1981 average again until 2000.
The cost to transport goods by truck has also increased with rising labor and diesel costs. Retail diesel averaged $6.38 a gallon the week of September 28, up 70% from $3.75 a year earlier, according to the EIA, which is challenging businesses to pass these costs on to their customers. The Wall Street Journal reported on September 28, 2026, that trucking expenses are at their highest level since the Covid pandemic. A shortage of truck drivers is adding to the pressure. According to the Journal, the Transportation Department has removed more than 28,000 drivers from the road for failing English-proficiency tests since early 2025 and has pushed states to cancel more than 30,000 commercial driver's licenses (CDLs).
We are monitoring how consumers are navigating these challenges. Consumer spending represents about two-thirds of U.S. Gross Domestic Product (GDP), and any change in spending has an immediate impact on the economy. So far, consumers have kept spending despite rising prices. According to the U.S. Bureau of Economic Analysis, consumer spending adjusted for inflation has grown about 2.7% a year since mid-2016, which means spending has outpaced price increases. It reached a record of about $16.8 trillion in the second quarter of 2026.
Unfortunately, consumers are not happy about the continued increase in costs. The University of Michigan's consumer sentiment index was 48.1 in September, near the record low of 44.8 set in May, the weakest reading since the survey began in 1952. In our view, the risk is that consumers may begin slowing their discretionary spending to offset the rising costs of staples. Discretionary items such as travel, jewelry, dining, and hospitality typically represent more profitable spending than staples such as food, household items, and utilities. This is particularly important with the holidays only a few months away, a season that accounts for roughly one-fifth of annual retail sales and a larger share of profits for many retailers.
What does this mean to me?
So how are investors responding to all these economic headwinds challenging businesses and households? Market behavior suggests institutional investors are not rushing for the exits. The major U.S. indexes have been largely range-bound since early June rather than selling off, which in our view reflects investors weighing these risks against the resilience of corporate earnings and the economy.
Second-quarter results help explain that resilience. According to LSEG data reported by The Wall Street Journal on August 31, 2026, S&P 500 earnings per share rose 53% from a year earlier, while sales increased nearly 16%, one of the strongest quarterly sales gains since 2021. Much of the earnings jump came from one-time investment gains at Alphabet and Amazon. Excluding those two companies, earnings grew about 33%, according to LSEG, still the strongest since 2021.
While these inflation and energy pressures remain important risks, our current model positioning continues to reflect a balanced view. Where it fits a client's goals and time horizon, our models continue to hold equity exposure supported by earnings resilience, alongside diversified fixed income, defensive sectors, and inflation-sensitive holdings.
In our opinion, the U.S. economy and stock market remain on solid footing, though risks have risen. This is an important time to monitor economic events as financial headwinds can turn into tornadoes. Equally important is to know your long-range goals and parameters to achieve them. Having a financial plan that specifically defines your goals is a key to knowing your risk and loss tolerances that will influence developing your investment strategies and allocations.
Headwinds come and go, and our job is to watch them closely on your behalf. If you have questions about how your portfolio is positioned for higher prices, schedule a conversation with us.
Important Disclosures Up Capital Management is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. The opinions expressed are as of September 29, 2026 and are subject to change without notice. This commentary is for informational purposes only and is not individualized investment advice or a recommendation to buy or sell any security. References to specific companies or funds are for illustration only and should not be taken as recommendations. Up Capital Management and its clients do not currently hold positions in the securities mentioned but may buy or sell them at any time. Indexes are unmanaged, do not reflect fees or expenses, and cannot be invested in directly. Forward-looking statements involve risk and uncertainty, and actual results may differ materially. Past performance is not indicative of future results. Third-party data from sources including the U.S. Bureau of Labor Statistics, Bureau of Economic Analysis, Energy Information Administration, Mortgage Bankers Association, University of Michigan, LSEG, The Wall Street Journal, Trading Economics, and YCharts is believed reliable but is not guaranteed.