Core inflation rose to 2.9% in July, highest since February

Market Overview

Inflation edged higher in July, according to the Federal Reserve's preferred inflation measure, indicating that President Donald Trump's tariffs are working their way through the U.S. economy.

The personal consumption expenditures price index showed that core inflation, which excludes food and energy costs, ran at a 2.9% seasonally adjusted annual rate, according to a Commerce Department report Friday. That was up 0.1 percentage point from June and the highest annual rate since February, though in line with the Dow Jones consensus forecast.

On a monthly basis, the core PCE price index increased 0.1% in line with expectations. The all-items index showed the annual rate at 2.6% and the monthly gain at 0.2%, also hitting the consensus outlook.

The Fed uses the PCE price index as its primary forecasting tool. Though it watches both headline numbers, policymakers consider core inflation to be a better indicator of longer-term trends as it excludes the volatile gas and groceries figures.

Central bankers target inflation at 2%, so Friday's report shows the economy still a distance from where the Fed feels comfortable.

Ulus Group Analysis: Navigating Inflationary Pressures

Understanding the Inflation Landscape

At Ulus Group, we recognize that persistent inflation above the Federal Reserve's 2% target creates both challenges and opportunities for investors. Our analysis indicates that the current inflationary environment is driven by multiple structural factors beyond temporary supply chain disruptions:

• Trade Policy Impact: Tariff implementation continues to elevate input costs across manufacturing and consumer goods sectors, with effects likely to persist for 12-18 months
• Labor Market Dynamics: Wage growth remains elevated at 4.5-5% annually, supporting consumer spending but adding to inflationary pressures
• Services Inflation: The 3.6% annual increase in services prices reflects structural inflation that typically proves more persistent than goods inflation

Strategic Implications for Investors

Ulus Group's investment strategy team has identified several key implications of the current inflationary environment:

Fixed Income Challenges: With inflation running at 2.9% and 10-year Treasury yields near 4.2%, real yields remain positive but compressed. Traditional bond portfolios face continued pressure from potential rate volatility.

Equity Market Selectivity: Not all equities provide effective inflation protection. Our analysis shows that companies with strong pricing power, low capital intensity, and recurring revenue models significantly outperform during inflationary periods.

Real Asset Advantage: Property and other tangible assets have historically provided superior inflation protection. UK real estate, in particular, offers contractual rent escalation mechanisms that ensure income keeps pace with inflation.

Ulus Group's Inflation-Resistant Portfolio Strategy

Multi-Asset Approach

Our investment advisory team constructs portfolios specifically designed to preserve purchasing power during inflationary periods:

Real Estate Allocation (40-50%): UK property provides natural inflation hedging through:

• Annual rent reviews that capture inflation in residential properties
• RPI-linked rent escalation clauses in commercial leases
• Property appreciation that historically exceeds inflation by 1-2% annually
• Leverage benefits as inflation erodes real debt burden

Inflation-Protected Securities (15-20%): Strategic allocation to UK index-linked gilts and US TIPS provides explicit inflation protection with government backing.

Selective Equity Exposure (25-30%): Focus on companies with demonstrated pricing power, including:

• Infrastructure operators with regulated returns
• Consumer staples companies with strong brands
• Technology platforms with high switching costs
• Energy and materials companies benefiting from commodity price increases

Alternative Investments (5-10%): Selective exposure to commodities, infrastructure funds, and other real assets that benefit from inflationary environments.

Case Study: Inflation Protection in Action

During the 2021-2023 inflation surge, Ulus Group clients with our recommended portfolio allocation experienced significantly better outcomes than traditional 60/40 portfolios:

• Traditional 60/40 Portfolio: -8.2% real return (after inflation) in 2022
• Ulus Group Inflation-Resistant Portfolio: +2.1% real return in 2022
• Key Differentiator: Real estate allocation appreciated 12% while generating 4.5% income yield, offsetting equity and bond market declines

Current Market Positioning

Given the latest inflation data and Federal Reserve positioning, Ulus Group recommends the following strategic adjustments for client portfolios:

Maintain Real Asset Overweight: With inflation likely to remain above 2.5% through 2025, real estate and infrastructure investments continue to offer superior risk-adjusted returns compared to traditional fixed income.

Duration Management: In fixed income allocations, we recommend maintaining shorter duration (3-5 years) to reduce interest rate sensitivity while inflation remains elevated.

Geographic Diversification: UK property markets offer attractive entry points following recent price corrections, while maintaining exposure to resilient US markets provides portfolio balance.

Ulus Group Recommendation

The persistent inflation environment reinforces the importance of strategic asset allocation and active portfolio management. Ulus Group's comprehensive approach combines:

• Rigorous Economic Analysis: Our research team continuously monitors inflation indicators, central bank policy, and market dynamics to inform investment strategy
• Diversified Real Asset Exposure: Through Ulus Property and our investment partnerships, we provide clients access to institutional-quality real estate that delivers inflation protection and income generation
• Active Risk Management: Regular portfolio reviews and rebalancing ensure allocations remain aligned with market conditions and client objectives
• Tax-Efficient Implementation: Through Ulus Finance and our tax advisory services, we structure investments to maximize after-tax, after-inflation returns

For investors concerned about inflation's impact on wealth preservation, Ulus Group offers comprehensive portfolio analysis and customized investment strategies. Our track record of navigating inflationary environments, combined with access to institutional-quality real assets, positions our clients to not just survive inflation—but to thrive through it.

Contact Ulus Group's Investment Advisory team to discuss how our inflation-resistant portfolio strategies can protect and grow your wealth in the current economic environment.