For almost two years, markets have been waiting for the American consumer to capitulate. Every rise in inflation, every increase in interest rates, and every geopolitical shock has been expected to trigger the long-awaited slowdown. Yet once again, the data tell a different story. Despite inflation accelerating to 4.1% in May, its fastest pace in more than three years, US consumers continued to spend. Real personal consumption increased by 0.3%, disposable income recovered, and employment remained remarkably resilient. The message is clear: the engine of the world’s largest economy is still running.

This resilience comes as a surprise to many investors. The latest inflationary wave was triggered by the Middle East conflict, which briefly pushed energy prices sharply higher before the recent US-Iran ceasefire brought some relief to oil markets. However, while lower oil prices may ease headline inflation over the coming months, they are unlikely to eliminate the broader inflationary pressures building inside the economy. Core inflation remains stubbornly elevated because the drivers have changed. This is no longer simply an energy story. Labour markets remain tight, wages continue to rise, fiscal policy remains expansionary, and, perhaps most importantly, an unprecedented investment cycle linked to artificial intelligence is fuelling demand across multiple sectors of the economy. Data centres require semiconductors, electricity, construction materials, transport infrastructure and highly skilled labour. The inflationary impulse has therefore become far broader than higher petrol prices.

Perhaps the most remarkable aspect of the latest figures is not consumer spending itself but the confidence behind it. Real disposable income has finally begun to recover, tax refunds have supported household finances, and strong equity markets continue to generate positive wealth effects. Consumers are certainly becoming more selective, searching for bargains and postponing discretionary purchases, but they are far from retreating. Retailers may report changing buying habits, yet aggregate consumption continues to expand. This explains why financial markets have dramatically reassessed the Federal Reserve’s policy outlook.

Only a few months ago, investors were debating when the next rate cut would arrive. Today, the discussion has shifted towards whether further tightening may ultimately become necessary. The latest inflation figures reinforce the message Kevin Warsh delivered at his first Federal Reserve meeting: restoring price stability remains the central bank’s overriding priority. The combination of resilient growth and persistent inflation leaves the Federal Reserve with little room to relax. Ironically, the recent peace agreement with Iran may not materially change this picture. Lower oil prices should reduce headline inflation during the second half of the year, but monetary policy cannot respond solely to temporary movements in energy markets. Central bankers are far more concerned by broad-based inflation embedded in wages, services and domestic demand.

This is where many investors risk making the wrong conclusion. Lower oil prices do not necessarily imply lower interest rates. If economic activity remains robust and consumers continue to spend despite higher borrowing costs, the Federal Reserve may decide that restrictive monetary policy needs to remain in place for considerably longer than markets anticipated only a few months ago. For financial markets, this represents a profound change in regime. During the decade following the Global Financial Crisis, investors became accustomed to an environment in which every economic slowdown was met with lower interest rates and abundant liquidity. Today, the opposite may increasingly become the norm. Strong growth is no longer unequivocally bullish because it also prolongs inflation and delays monetary easing.

This creates a far more challenging investment environment. Equities can continue to perform, but valuations become increasingly difficult to justify as the cost of capital rises. Long-duration bonds remain vulnerable if real yields continue to climb. Credit markets will have to discriminate far more carefully between strong and weak borrowers. Above all, investors can no longer assume that central banks will rapidly come to the rescue whenever markets stumble. The American consumer has once again demonstrated extraordinary resilience. Ironically, that may be exactly what prevents interest rates from falling. And for investors, that may prove to be the biggest challenge of all.