The recent inflation bombshell must have rattled Powell and his cohorts, throwing a wrench into their plans for imminent rate cuts in pursuit of a smooth economic descent. Equities, too, find themselves on shakier ground.
‘High’ is an understatement
Directing our attention to the Core Services ex Housing Consumer Price Index (CPI), the three-month annualized inflation, Powell’s favored metric, stood at a staggering 6.7% in January. Yes, you read that right—almost 7%. To put this into perspective, it’s the fourth-highest figure since the inflation saga kicked off in late 2021. If this had surfaced in the latter half of 2022, the Federal Reserve would likely have faced some tough quarters.
Shifting panels
The concern isn’t merely about the inflation figure’s altitude. It coerces Powell to acknowledge this somewhat obscure metric, despite his reluctance. The three-month annualized inflation, excluding the housing market, appeared briefly and then receded. Powell’s current focus revolves around orchestrating a soft landing, relegating inflation concerns to the background. Those tuned into recent FOMC press conferences won’t find this shift surprising, given Powell’s eagerness to distinguish himself from colleagues and avoid recession pitfalls.
Will the doves keep flying?
Powell’s dovish rhetoric faces constraints after robust job growth and surging ISM price indices. The disappointing inflation figure leaves scant room for a mild message at the upcoming March 20 FOMC meeting. Another CPI report awaits before the meeting, adding anticipation.
Moreover, Powell’s attention centers on the PCE - personal consumption expenditures - inflation figures, due to be released on 29 February. Here, Core Services ex Housing appears more amicable. In December, this inflation measured a modest 2.1%, half of its CPI counterpart. However, if January mirrors the CPI›s rise, PCE inflation could surge to 4.9%—a far cry from the 2% target.
As inflation volatility lingers, the burning question is: which asset class bears the brunt more, equities or bonds? I do have the answer, do you?
Jeroen Blokland, founder of True Insights and former head of multi-assets at Robeco, shares his weekly insights every Monday on Investment Officer Luxembourg.