Inflation Still High
The Fed’s primary focus has shifted since last summer from the labor markets to inflation and rightly so. Inflation is proving stickier than everyone had hope. The Core Personal Consumption Expenditures index came in at 2.8% for the trailing 12 months. Given that this data point hit a recent low of 2.6% in June, we have seen six months of flat to slightly higher core inflation. More inflation info. will coming out shortly. The stalling of this disinflation pattern is a major concern for the Fed. They do not want to undo year of work that forced inflation down form the post-pandemic peak.
There has been a huge injection of additional uncertainty into the inflation equation by the potential effects of tariffs. The new administration announced 25% tariffs on imports from Canada and Mexico and 10% on China. President Trump, Mexican President Claudia Sheinbaum, and Canadian Prime Minister Justin Trudeau have already reached temporary agreements to pause the tariffs in exchange for greater border security, as well as action on gun and fentanyl smuggling. We will keep a close eye on how these tariffs are administered and if the rhetoric is toned down over time.
We mentioned that the Federal Reserve is concerned by that lack of recent progress toward its 2% inflation target. So much so that many observers have wondered if the central bank has “paused” its rate-cutting efforts. Chair Jerome Powell has been non-committal, saying only that the Fed is in no rush to implement additional policy cuts. The lack of action at the January meeting and the Open Market Committee’s more hawkish statement has created its own brand of uncertainty.
Many of you have heard by now about DeepSeek. The new open-source Artificial Intelligence (AI)model developed in China. Which purportedly can compete with ChatGPT and other US models at a significantly lower cost. Many questions remain about DeepSeek. Reliable information on development costs and functionality is scarce right now. And even if the Deep Seek story rings true, the result will likely be improvements to US AI models. One thing is certain: The Deep Seek story is a prima facie example of the type of volatility trigger that will rattle investors from time to time this year.
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