The Most Important Debate on Wall Street: Is Inflation Licked?
Most of Wall Street thinks inflation has been conquered. There is a lot at stake if they are wrong. Encouraging inflation data recently propelled a big rally across markets, with a traditional portfolio of stocks and bonds last month delivering one of its best returns of the past 30 years.
Confident that the Federal Reserve is now cruising to its goal of 2% inflation, investors have dialed up bets that the central bank will start cutting interest rates by spring to prevent a recession. That would mark the end of an inflation-fighting campaign that has rattled markets since early 2022. Still, the Fed’s preferred inflation gauge remains elevated at around 3%.
And some investors are concerned it could be hard to get all the way back to 2%, leaving stocks and bonds vulnerable to a pullback. Here is a deeper look at the arguments for and against inflation optimism. The case for optimism There are many ways to measure inflation.
The Fed’s official mandate is to target 2% inflation as measured by the 12-month change in the personal-consumption expenditures price index. In practice, Fed officials tend to focus on the core PCE index, which excludes volatile food and energy categories. They also track three- and six-month price changes to understand more-recent dynamics.
Those figures are what have excited investors. Across 12 months, core PCE inflation was still around 3.5% in October. But on a three-month annualized basis, it was just 2.4%.
Some analysts say inflation is likely to keep declining as pandemic-era effects continue to fade. A big driver of inflation in 2021 and 2022: Everyone was spending money on the same things at the same time. First it was on goods, when people were stuck at home and flush with
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