What if we haven’t heard the last of US inflation?

• Clément Inbona
  Fund manager
  LFDE

Firstly, because this figure is well above the average of economists’ consensus estimates, which were for just +0.3%, and secondly because it is north of even the highest expectations. With year-on-year inflation running at 3.0% in January – on a constantly rising trend since September – the hope of getting the inflation genie back in the bottle looks to be receding again. So should we be worried about a second wave of inflation as happened at the end of the seventies?

Not really. January is traditionally the month when economists are furthest from the mark. Why? There are two main reasons for this: firstly, data for January is muddied by a weightings revision in the consumer basket, and secondly, the Bureau of Labor Statistics readjusts seasonal effects based on the previous year, making a comparison particularly difficult at the start of the year. Since 2022, January has systematically been the month when the consensus has underestimated inflation to the greatest degree. And for the producer price index (PPI), the figures are even more telling – in 9 of the last 10 years, expectations proved too low in January! This “first month of the year” effect is, in principle, transitory.

Nonetheless, within a few moments of the publication of this data, there was a sharp rise in the US 10-year yield – up 14 basis points, whilst the S&P 500 fell 1%. However, markets soon came to their senses. These moves were fully reversed on the very next day, despite the fact that the PPI was of a similar ilk to the CPI – up and higher than expectations. This is surprising at first glance, but logical if we take a closer look.

The same seasonal factors muddy the waters for the PPI as for the CPI. Furthermore, some of its components are included in the calculation of the personal consumption expenditures (PCE) price index – the Fed’s preferred measure, which will be published later in the month. And these components actually came in below expectations, suggesting that the PCE figure will be reasonable. Lastly, this overall scenario on prices is in step with the US central bank’s stance. Traditionally, financial markets are nervous when they worry that the Fed is behind the curve, i.e. too late with its tightening or easing cycle. But currently, there are no such fears. Jerome Powell is taking a cautious and fiercely independent approach in response to the political meddling of the new Trump administration. When the Fed is ahead of the curve, markets rise.

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Disclaimer
The opinions cited are those of the fund manager. LFDE shall not be held liable for these opinions. Final version of 14 February 2025 – Clément Inbona, Fund Manager, La Financière de l’Échiquier (LFDE). This information, data and opinions of LFDE are provided for information purposes only and therefore do not constitute an offer to buy or sell any security, nor do they constitute investment advice or financial analysis.