“Sticky” Inflation and the Lessons of 2003

Inflation has proven stubborn, energy costs have surged on the current conflict in the Middle East, and markets have been choppy. All of that is real. But the discomfort of the headlines is not the same as a genuine threat to your long-term plan. History, and the Spring of 2003 in particular, offers a steady reminder: the worst of the fear is usually priced in before the worst is known.

Your plan was not built just for calm weather. It was built for this.

Peter Bernstein in his book Against the Gods: The Remarkable Story of Risk, states “The essence of risk management lies in maximizing the areas where we have some control over the outcome.” We can’t tell you where oil trades next month or when inflation cools. No one can. What we can do, and have already done together, is keep a financial house that stands up in all kinds of weather.

What’s Actually Happening With Inflation

Consumer prices rose 4.2% over the twelve months through May 2026, the highest reading in roughly three years and the third straight month of acceleration. The largest driver of this increase, by far, was energy, which increased 23.5% over the same time-frame. Gasoline and related costs have climbed sharply over the past year, accounting for the bulk of the recent rise.

The conflict with Iran disrupted shipping through the Strait of Hormuz, which carries roughly a fifth of the world’s seaborne oil. The International Energy Agency has called the result among the “largest supply disruptions the oil market has ever seen”. Crude spiked, gasoline followed, markets turned volatile, and longer-term interest rates pushed up to multi-year highs. That is an honest picture. It is also not the entire picture.

Why “Sticky” is the Word That Matters…

There are two meaningful components inside the idea of “sticky” inflation now: energy and shelter & services. Understanding how these aspects are influencing overall inflation is the difference between reacting and responding.

• Energy Spike: fast, loud, and tied to a single event. Energy prices climb breathtakingly fast but fall just as fast when the shock eases. That dynamic has already begun to turn. As a U.S.-Iran framework has taken shape and pressure on the Strait has eased, crude has retreated meaningfully from its highs. The reading that frightened everyone this spring may look very different by autumn.
• Shelter & Services Inflation: Shelter, which is the largest item in most family budgets, was up about 3.4% over the past year. While the historical average since 1952 is actually 4.11% according to the Federal Reserve, it is the largest and heaviest component of the Consumer Price Index (CPI) and has cumulatively increased since 1952. Housing costs tend to move slowly, adjusting gradually as leases come up for renewal, and many professional services follow a similar pattern. This kind of inflation doesn’t ease just because a conflict does. It fades gradually, and only with time.

Here is the practical takeaway: the part of inflation generating the scariest headlines is often the part most likely to reverse. The aspect of inflation most likely to persist is quieter and slower to change. In our current environment, these aspects of inflation involve increasing costs of shelter and services. A well-designed plan should be addressing the influence of persistent inflation, holding investments that are designed to address the slow erosion of a dollar’s value due to rising costs over time.

2003 vs. 2026 – Insights for Today

In 2003, the United States was on the brink of the Iraq War. As students of history, we can’t help but find parallels between today and 2003.

In the weeks before the war, markets were nervous and falling. The S&P 500 had declined roughly 15% from late 2002 into early 2003 as investors braced for the worst: a long war, damaged oil fields, a fresh energy crisis on top of an economy still healing from the dot-com crash. Oil carried a clear “war premium,” rising about 14% in the market run. Headlines were grim and uncertainty was everywhere.

Then something counterintuitive happened: the market bottomed just days before the invasion began on March 20, 2003. Once the fighting started it became clear the oil fields would be captured largely intact and the conflict wouldn’t spiral into a regional energy catastrophe, the premium in oil prices began to unwind, and stocks turned upward. Oil fell several dollars in the first week alone. The S&P 500 rallied through the three weeks of major combat and kept climbing, finishing up roughly 26% for 2003.

This particular market and economic environment has been studied closely, as many significant events are. The conclusion reached by many was that markets had built in a sizable discount out of fear, and a large share of it reversed as soon as the feared scenario failed to materialize. Temporary damage was done in anticipation of calamity but to disciplined investors holding firm to a defined investment philosophy and strategy, it did not destroy their financial house.

How Does This Parallel Hold Now?

The structural lesson of 2003 holds today: a geopolitical risk premium gets priced in ahead of an event, and it tends to unwind when uncertainty resolves. Talks of peace, retreats, the opening of the Strait, and numerous other conversations around events in 2026 can move markets on a daily basis, just like in 2003.

Assessing the 2003 energy shock, it was more modest compared to the events facing the world today. Oil rose only about 14% at that time, and Saudi Arabia and OPEC had enough spare capacity to cushion the lost Iraqi barrels. The 2026 disruption to the Strait of Hormuz was, by the IEA’s own description, was far larger. So, this energy shock hit inflation harder than 2003’s did, and the sticky, slow-moving core may take longer to settle. History rhymes; it rarely repeats note for note.

Whether the parallel is exact or only directional, the response is the same: not prediction, but preparation.

The True Lesson: Control What You Can Control

Stay invested, deliberately. The 2003 investors who were punished sold into the fear and missed the turn. Time in the market has consistently mattered more than the timing of the market. Making timing decisions when trading requires being right twice…knowing when to get out and when to get back in. The evidence anyone does that reliably is thin.

Let volatility do useful work. Disciplined rebalancing trims what has grown in value over time and adds to what has gone “on sale”. In addition to the discipline of thoughtful rebalancing, volatility can also provide opportunities for tax-loss harvesting, which turns a paper decline into a very real tax benefit to offset future capital gains. Both of these strategies are employed for Sterling clients as opportunities arise.

Keep your financial foundation sound. Diversification in your financial foundation is extremely important when reviewing your investment plan. For families drawing on their portfolios to create an “investment paycheck”, the answer to a stretch of volatility (or “sticky inflation”) isn’t prediction. It’s structure. A thoughtfully sized cash reserve means you’re never forced to sell stocks at a low to fund future spending. This structure is what helps long-term money stay long-term.

Keep the tax and estate house in order. Sticky inflation and a higher-rate environment change the math on everything from bond positioning to gifting strategy to how and when income is realized. These are exactly the controllable, durable decisions that compound quietly in your favor across decades…exactly the work a family CFO should be doing while the headlines swirl.

In his 2001 Berkshire Hathaway shareholder letter, Buffet introduced what he called the “Noah rule”: predicting rain doesn’t count; building arks does. It distills the same principle that anticipating risk isn’t enough; success comes from preparing for it.

For Sterling clients, your plan was designed precisely so that an energy shock or a frightening week of headlines doesn’t require you to do anything rash. We measure success in decades and generations, not quarters. If recent volatility has you uneasy, that’s reason enough to talk…not to make a dramatic move, but to confirm your strategy still fits your life. Reach out any time.

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This article is for informational purposes only and does not constitute investment advice. Past performance is not a guarantee of future results. All investments involve risk, including possible loss of principal. International investments involve additional risks, including currency fluctuations and political instability.