Inflation Reaccelerating, Danger Looms

This morning's PCE release means the disinflation of the past several months might have run its course. The S&P 500 hangs on for dear life.

Dear readers,

Our views adjust to the data and prices. We analyze the charts and fresh data and relay that information to you objectively, and the past few weeks have given us plenty to think about. Today, we’ll give you an updated view of money markets, rates, risk, and bitcoin; it all starts with what’s happening in the economy.

Hop in, and buckle up—inflation is reaccelerating.

The Fast and the Furious, 2001

Core PCE, one of the Fed’s most preferred inflation metrics, showed a slight uptick both on monthly and annual time series when it printed this morning. Annualized, core inflation is up 4.7% year over year. This isn’t the first time that Core PCE has changed directions, but is noteworthy in that the expectation was for a deceleration to 4.3%—so, this is a substantial upside surprise:

Can we see disinflation in this picture? Yes, the primary trend is down. Can we also imagine that ~4.5% might be as low as it comes for the next year or two? Absolutely. So far the camp that believes in structurally higher inflation is winning out, as monthly prints continue coming in with core PCE ranging around 4.75%. We don’t see it challenging 6% again as our base case, but if it sits near 5% for a while and doesn’t continue to trend below 4% or toward 3%, the Fed will have reason to keep going.

The market recognizes this dynamic too, look at how forward expectations for the Fed Fund’s terminal rate has changed: