Inflation Re-Acceleration Confirmed

US Core PCE rose 0.6% in January. Confirming inflation is by no means defeated. In fact, Inflation is winning the war over the Fed.

Core PCE accelerated for the second month in a row. From 0.2%, to 0.4%, to 0.6%. This is devastating to the Fed’s outlook after all the hard work already done in aggressively raising rates.

The through year number, which is apparently a favourite of the Fed, jumped to 4.7%. The market was expecting a much lower 4.3%, which would still have been of concern.

If all of this is not enough for the Fed to be panicking, remember the core number excludes gasoline prices which are clearly on the rise again and will eventually flow through to all goods and services prices.

The bell tolls, on even greater pipeline price pressures still to come across the economy.

The Fed is losing this battle, and will have to take far more strident action than markets have envisaged.

My forecast, remains un-changed at 5.75% to 6.5% for the Terminal Rate, with risk to 7.5%. More and more economists are beginning to recognise and forecast that an above 6% terminal rate for this Fed hiking cycle is a very real possibility. We knew it all along.

Our further risk scenario, that inflation is now so widespread, that there is already an upward prices/wages spiral in play, and that further gains in global oil prices will simply overwhelm any current Fed defences on the inflation flood plain, all point to the increasingly likely potential for this hiking cycle to persist throughout the year. With an above 7% Terminal Rate now firmly established clearly in sight on the economic horizon.

This means further melt down for US stocks, US property, a more significant economic slowing in general, and potentially yet another alarming and spectacular rally in the value of the US dollar.

While always on the look out for signs that the overall demise and falling back into the global pack of the US economy will one day tip the US dollar into an historic re-pricing lower phase, that day may still be some time off.

For the moment, and certainly this is already being seen in the price action, the US dollar may only be in the early stages of yet another tear higher. It is the resilience, indeed the re-acceleration of inflation and its win over the Fed at these rate levels, that is and will continue to catch the market by surprise.

The view here, remains, as it has since January 2022, to be defensive on stocks and property, while looking to buy a low in the US dollar. That low, has most probably now been seen on a medium term basis, as well as the obvious short term rally.

Any suggestion of a resurgent US economy at this stage is akin to a rave party about a single snowflake spotted somewhere in the Arizona desert. Momentary positive blips in a harsh landscape remains the view here as the Federal Reserve will be hiking rates for a very long time indeed.

US Consumer Spending had a very strong month, up 1.1%adjusted for price changes. This is in keeping with the pattern previously suggested of consumers taking advantage of post season sales. December saw declines in spending, only to be caught up post-season. This is likely a blip that will not last. It does however, provide further carte blanche for the Federal Reserve to keep hiking rates.

Their only mistake it would appear, was to slow to early to 25 points as some Fed members warned. The Fed will now be only too aware of this error, and 25 point rate hikes at consecutive meeting to the horizon are now a given.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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