Markets can often be inscrutable, as seen in December’s US inflation data, which showed a rise in headline inflation to 3.4 percent, unexpectedly surpassing the forecast of 3.2 percent.
Shares have been muddling along since, in a reaction seemingly consistent with these figures. Yet, this contradicts the trends observed in recent months.
The chart illustrating three-month annualised headline inflation reveals a drop to 1.8 percent in December, falling below 2 percent and marking the lowest level since June 2020. Additionally, after months of increase, core inflation measures have started to decline, including the core services excluding shelter CPI, previously emphasized by Powell. These measures remain high, but their downward movement is a positive sign.
Disinflationary trend
The current disinflationary trend appears to be holding, barring any further escalation in the Middle East. If the US economy begins to cool, which is likely, the underlying rate should gradually align with the 2 percent target. The potential for deflation following a significant monetary tightening cycle cannot be ruled out, especially with the recent Empire State Manufacturing Survey indicating a drop to the lowest level since May 2020.
Looking ahead, I anticipate higher and more volatile inflation rates over the medium to long term. Geopolitical tensions and evolving global supply chains are expected to drive prices upward. Central banks might also need assistance in achieving their implied goal of debt sustainability, posing challenges for bond investors.
Jeroen Blokland, founder of True Insights and former head of multi-assets at Robeco, offers these insights. His «Chart of the Week» is featured every Monday on Investment Officer Luxembourg.