MacroResearchBoard

U.S. Inflation: Losing An Anchor – February 18, 2025

A just-published report updated our investment recommendations and overall macro view. The critical issue, aside from the risk of a full-blown global trade war, is whether inflation will fade way and allow developed market (DM) central banks to cut rates further, providing support to the global economic expansion.

Ominously, the U.S. may be losing a key anchor that has helped to hold down inflation in recent decades, namely the nil or even mild deflation in core goods CPI. This anchor was courtesy of unprecedented globalization, free-ish trade, and the structural increase in the supply-side of the world economy. Worse, trade tariffs will act to push up goods prices, all other things being equal.

Meanwhile, service sector inflation remains elevated compared to recent decades. Although the DM inflation risks are highest in the U.S., where the output gap is the most positive, most other DM economies are also witnessing historically elevated and sticky service sector inflation.

For the U.S., the Fed’s number one stated goal is to return inflation to 2%. It is failing. The 100 bps in rate cuts since September have further stoked asset price inflation and provided additional stimulus to an already warm economy, putting an upward-sloping floor under inflation.