Are market watchers and investors celebrating the end of inflation too soon? With the election over, inflation and the Fed have returned to primacy in market narratives this fall. The Fed has cut rates multiple times and seemingly achieved that soft landing, but it bears mentioning that doubt remains about inflation. Whether inflation has been tamed or not will have significant bearing on the start of 2025. So is inflation tamed, or no?
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Throughout the rate cut process, the Fed has cautioned market watchers about inflation’s resiliency. Yesterday, San Francisco Fed economists pointed out that the tight labor market continues to add to inflationary pressures. October inflation came in a big higher after dropping significantly in September. It’s clear that we’re already in a bumpier inflation path than rate cut jubilance would imply by itself.
2025, Markets, and Inflation
Could that inflation stick around into next year, however, and stop dropping? There are some reasons to worry. Rate cuts could potentially “reinflate” parts of the economy, while burgeoning crypto investments could add more air to a bubble-shaped tech sector. None of this, of course, mentions the potentially severe inflation stemming from President-elect Trump’s plans for tariffs.
Perhaps the main factor going underappreciated in inflationary pressures, however, is housing. While some metrics discount housing costs, the national housing crisis has showed no sign of stopping. Especially as climate change continues to batter hot housing markets in the South, anemic construction elsewhere in the country likely will not tame housing inflation costs. While Fed officials expect housing costs may fade in the months ahead, structural factors in housing will keep pressure on consumers.
Should the Fed adjust its outlook due to bumpier inflation, market confidence could drop. In that case, areas like tech may be the first to suffer. With 2025 looking set for continued tightness in labor markets and high housing costs, inflation may not yet be truly tamed.
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