Inflation/Deflation

The AI boom will increase inflation in the near term and could also raise it over the long term. The Fed’s reluctance to hike rates is understandable, but it risks amplifying what may already be a brewing stock market bubble. 

Our Portfolio Allocation Summary for June 2026.

The April CPI report showed clear evidence of the direct effect of higher oil prices on inflation but, so far, limited evidence of passthrough to core.

Our Portfolio Allocation Summary for May 2026.

The global economy has weathered the oil shock reasonably well so far. However, the risk of a recession will increase meaningfully if the Strait of Hormuz remains closed into June.

So far, there is no evidence of second-round effects from the oil price shock showing up in the US economy. Fed rate hikes are off the table unless those effects emerge.

FOMC participants are coalescing around the idea that the funds rate will stay on hold for some time, an outcome that is now well priced in the bond market and that will not materially change under a new Fed Chair.

Inflation’s underlying trend was headed lower prior to the Iran war. This makes the recent back-up in bond yields look like an attractive buying opportunity.

Our Portfolio Allocation Summary for April 2026.

The Fed will not cut rates again until core inflation trends lower. This remains likely as the tariff impact on goods inflation wanes, but the recent energy price shock could delay any meaningful downtrend.